Conservation Has Stalled Industry Sales Growth

In the 1950s and 1960s, U.S. average annual electricity usage increased more than 7%, reflecting about 2% growth of new home construction and the widespread installation of energy intensive appliances such as refrigerators and freezers. By the 1970s, despite increasing use of air conditioners and continued growth of new home construction (about 3% annually), U.S. electricity sales only increased about 4% amid the initial implementation of energy conservation efforts. For instance, California initiated various appliance efficiency standards, and other states soon followed.

By the 1980s and 1990s, U.S. annual electricity growth slowed to about 2% as conservation became more widely adopted. In 1987, the National Appliance Energy Conservation Act established federal minimum efficiency limits for several common household appliances, supporting conservation efforts.

Since 2010, U.S. annual electricity sales have been essentially flat, reflecting universal adaptation of conservation measures such as the replacement of incandescent light bulbs with LEDs and continued appliance efficiencies. However, we anticipate that plug-in hybrids and electric vehicles (collectively EVs) will begin to increase by a more than 30% compound annual growth rate through 2025. This EV growth will begin to spur electricity sales, boosting North America's electric investor-owned utilities longer-term credit quality.

Chart 1

Electricity sales growth is important for the investor-owned utility industry's credit quality. Sales growth increases revenues, EBITDA, and funds from operations, without necessitating a rate increase. This enhances the industry's capacity to maintain its financial measures without depending on a regulator's consistent constructive rate case order, improving the industry's ability to effectively manage regulatory risk.

While many utilities have maintained credit quality over the past decade without electricity sales growth, it requires a more sophisticated approach towards managing regulatory risk. Without growth, utilities must constantly minimize regulatory lag--the timing difference between when utilities incur costs and when regulators allow them to fully recover costs from ratepayers--to earn their authorized return on equity. To minimize this lag, most of the industry has implemented some combination of decoupling, formula rate plans, forward test years, multiyear rate cases, and regulatory riders over the past decade.

More EVs Will Spark The Utility Industry's Sales Growth

Our base case assumes that U.S. electricity usage will essentially remain flat because of conservation and only start climbing as EV adoption accelerates. We anticipate that by 2030, despite continued conservation, electricity sales growth will consistently increase to about 0.5%. We also expect that EV use will increase the utility industry's capital spending, primarily reflecting more utility investments in make-ready infrastructure to support the build-out for charging stations.

Chart 2

Since 2020, EV adoption has increased by more than 100%. EVs represented only about 2% of all new light vehicle sales in 2020, but by 2022 this increased to more than 7%. Carbon-conscientious consumers, looking to reduce their environmental footprints, and state policies including incentives and mandates are the key drivers for this growth.

State Policies Will Continue To Promote EV Adoption

Approximately 40% of all zero-emission vehicles sold in the U.S. are sold in California, making it the state with the highest percentage of EV owners. California's high adoption is driven by its many grants, rebates, and tax incentives that make EVs more affordable and attractive to consumers. The state has 180 EV incentives, significantly more than New York, which has the second most at just 63. California's incentives have proved effective, as more than 20% of all new cars sold in California during the first half of 2023 are zero-emission vehicles.

We expect California will maintain its lead because in August 2022 it mandated that all new cars, trucks, and SUVs must run on electricity or hydrogen by 2035. California has since filed with the U.S. Environmental Protection Agency to approve a waiver under the federal Clean Air Act to enact this mandate. Other states including Maryland, Massachusetts, New Jersey, New York, Oregon, and Washington are contemplating similar mandates that we expect would correlate to further EV growth.

Chart 3

We Forecast EVs Will Be 18% Of Light Vehicle Sales By 2025

EVs remain in their early stages, having only attained a small percentage of the overall auto market. By 2025, S&P Global Ratings anticipates that new EV sales will account for about 18% of all new light vehicle sales in the U.S.

To assess the longer-term effect on the utility industry, we further analyzed the industry based on low, middle, and high EV sale scenarios. Under our low scenario, new EV sales could account for 30% of new car sales by 2030, then increasing to about 40% by 2035. Under our high scenario, new EVs would account for 45% of new automobiles in 2030 and about 70% by 2035.

Chart 4

As EV adoption accelerates, we anticipate electricity sales will increase. In 2022, total electricity sales were about 4.05 trillion kilowatt hours (kWh), with only a negligible 0.3% attributed to EVs. On average, we estimate that each additional EV adds about 3,500 kWh annually. In comparison, an average household requires 8,500 kWh annually, meaning that about every 2.5 EVs use approximately the same electricity as a single household. By year-end 2023, we anticipate that about 5 million EVs will be operating across the U.S., requiring about a cumulative 17.5 billion kWh.

For our analysis, we assume, absent EV growth, electricity sales for the next decade would essentially remain flat because of continued conservation. We anticipate that as adoption of EVs increase, they will account for a higher percentage of electricity sales. Consistent with our 2025 forecast, new EV sales could increase annual additional demand by about 10.5 billion kWh, the equivalent of adding about 1.2 million households. However, cumulative electricity sales associated with EVs would still only account for less than 1% of all sales. Additionally, year-over-year electricity sales growth would still be relatively flat.

Under our middle scenario, by 2030, annual additional electricity demand attributed to new EVs could increase by about 24 billion kWh, equivalent to about 2.8 million additional households. Cumulative electricity sales associated with EVs would account for about 3% of total U.S. electricity sales, and year-over-year U.S. electricity sales would increase by more than 0.5%. By 2035, EVs could account for 5% of total U.S. electricity sales and year-over-year annual electricity sales growth could increase by about 0.8%.

Chart 5

Although this growth may seem marginal, the industry hasn't experienced a similar growth opportunity since the refrigerator became mainstream decades ago. We believe this longer-term trend supports the electric utility industry's credit quality. Although the customer bill will inevitably increase because of higher electricity sales for EVs, we expect the industry will effectively manage this risk. Electricity usage will displace higher fuel costs that customers previously paid to operate internal combustion engine vehicles, helping to mitigate this risk.

Utilities Will Increase Capital Spending For Make-Ready Infrastructure

The lack of sufficient charging stations serves as a barrier to wider-spread EV adoption, with drivers' range anxiety being a key deterrent. S&P Global Mobility assesses that public and restricted access chargers will need to quadruple by 2025 and increase more than eightfold by 2030 to support anticipated EV growth. Despite this need, our base case assumes the investor-owned electric utility industry will not play a significant role in the build out of charging stations primarily because utility involvement could drive out private investments. Instead, we expect the industry will focus on make-ready infrastructure--the behind-the-scenes electrical infrastructure necessary to support EV charging stations.

Chart 6

While many utilities have filed with regulators for the build-out of EV charging stations along major highway corridors and in rural areas, where private investment is less desirable, the results have been mixed. Many regulators agree that these programs fill a void where EV charging stations may be unprofitable for the private sector, but most approved programs have been either pilot programs or smaller projects. Other regulators have denied any utility involvement, viewing EV charging station programs as non-essential because EV adoption rates remain well below 10%. However, should regulators begin to approve larger-scale charging station programs, industry capital spending would undoubtedly increase. This would likely promote higher EV adoption and even more electricity sales growth.

Thus, we anticipate that the industry will focus on investing in make-ready infrastructure for EV charging stations. Many utilities have already implemented such programs. For example, Consolidated Edison Co. of New York Inc. began a program approved by regulators that supports an additional 20,000 EV chargers in its service territory by upgrading transformers. In California, Pacific Gas & Electric Co.'s program for commercial customers will support the installation of public charging stations with a minimum 50 kW output. We increasingly anticipate that utilities will continue to develop these programs, increasing the industry's capital spending.

Industry's Credit Quality Benefits From EV Growth

We anticipate that, despite our expectations for continuous conservation, energy sales will increase in the long run as EV adoption gains traction. We expect such growth will improve the industry's ability to effectively manage regulatory risk, reducing its reliance on consistently receiving constructive rate case orders, and supporting the industry's credit quality.

North America's investor-owned regulated utility industry's capital spending is at a record $200 billion. We expect this will only further increase as investments in make-ready infrastructure increases. As such, the industry's ability to effectively manage regulatory risk will remain critical as capital spending rises and the timely recovery of these investments becomes increasingly important. While energy transition and inflation will put pressure on the industry's credit quality in the short term, EV expansion and the restart of electricity sales growth should support credit quality over the longer term.

Related Research

• U.S. Auto Sector Ratings Could Remain Resilient Despite Slowing Macro Conditions And Rising Pricing Pressure, Oct. 11, 2023
• U.S. States Jump Start Electric Vehicle Charging Infrastructure, Sept. 21, 2023
• Industry Top Trends Update North America: Regulated Utilities, July 18, 2023