Utilities Must Contend with Three Major Challenges to Electrification

The electrification of the energy industry entails more than just electric vehicles. Space heating, water heating, and the electrification of industrial resources are other ways we can move to a more electrified economy. Among other trends, a new report from the American Public Power Association details how far we have already come in terms of electrifying residential buildings, and also outlines some of the potential challenges of moving ahead with even more electrification.

Residential building electrification has taken off since the early 1950s. In many parts of the country, particularly in the southeast and southwest, it is not just space cooling that has been electrified. Approximately 40% of U.S. homes are primarily heated by electric sources.[1] In ten states, electricity accounts for at least 65% of all household energy use.[2] These are all generally warm weather states with relatively low residential electric rates. The exception is Hawaii – the warmest state based on annual average temperature, and one with little to no heating load.

Meanwhile, the most energy-intensive states are generally colder states with low levels of electrification. The three most energy-intensive states (in terms of per capita consumption) are North Dakota (103.3 million Btu), Montana (98.8), and Wyoming (92.9). All three states have average annual temperatures in the low 40s, and all three rank in the bottom half of states by electrification usage. The remaining states in the top 10 for energy intensity are a mixed bag of cool and temperate climates — the warmest average temperature is Missouri at 54.5 degrees, with electric usage tightly bunched at 47.4% to 50.8%. Maine, ranked 10th in per capita energy usage, is an outlier at 29.5% for electric usage. Maine is also the only state in the northeast in the top 10, with somewhat older housing stock and only 7.4% of homes using electric heat, almost the lowest in the country, second only to Vermont (5.4%). 

The correlation between temperature, however measured, and energy intensity and electrification reveal some interesting points about the current state of heating technology. First, home heating is generally more energy intensive than cooling load, and most of the colder climates currently rely predominantly on at-home fueling, particularly natural gas. A National Renewable Energy Laboratory study of building stock separated the United States into different regions based on climate, and the cold/very cold region accounted for 49% of national thermal energy use despite accounting for only 34.5% of U.S. housing stock.[3] Space heating was responsible for most of this thermal energy use, especially in mobile homes.

When it comes to the cost of energy, it comes as no surprise that residents with higher electric bills, regardless of rates, also use more electricity. Household consumption in the states in the top half of electric bills is 11,309 kWh per annum, versus 9,871 kWh in the states (plus District of Columbia) in the bottom half. Also, unsurprisingly, states with higher average residential electric bills tend to be those with higher rates of electricity as a percentage of final energy: over 60% on average in the top 25, with states in the bottom half of bills at slightly less than 48%.

Overall energy bills tell a slightly different story. Based on EIA’s SEDS data, which provide total energy expenditure, shows that most of the states with the 20 highest average annual total energy bills have electricity usage percentages lower than average residential electricity usage percentages.

Conversely, the nine states with the highest electrification rates, after Hawaii, average out to monthly bills of approximately $129, or just $22 more than the 10 states with the lowest rates of electrification. In short, even in states where people pay higher than average electric rates, with higher electric end use, their total energy bills end up being lower than average.

Electrification may have both environmental and economic benefits in the long term, but there are a few potential challenges to increased electrification. First, despite an increasing divergence in the cost of electricity and the cost of other fuel technologies, the cost of transitioning to electrified end-uses may be substantial. The cost of retrofitting a house that has existing fossil fuel-based heating technology with electrified space heating is substantially greater than constructing an entirely new house that has electrified sources of heating. One estimate places the cost of fully electrifying 50 million homes over the next decade at between $8.8 billion to $26.5 billion per year.[4] Even newly constructed all-electric homes have slightly higher construction costs than non-electric homes.[5] While efficient electric end-uses may save customers on fuel costs over the long-term, the upfront costs are still significant. This is true of EVs, where upfront costs are still higher than gasoline-powered vehicles, even if the long-term savings in fuel cost make for a lower total cost of ownership over the lifespan.
Another looming issue is the supply chain. Of particular importance is the supply and delivery of lithium, which is the backbone of lithium-ion batteries. Those batteries will impact electrification directly through the manufacture of EVs and indirectly for use in both small- and large-scale energy storage. Other materials, such as copper and nickel, are also used in battery production.

Most production today takes place in a select few countries, often on the other side of the world from the United States. As of 2020, Australia was responsible for 48% of global lithium production, with China accounting for 79% of graphite production, and the Democratic Republic of the Congo accounting for 69% of the cobalt supply.[6]  Some of these countries are experiencing internal political turmoil and/or are geopolitical rivals with the United States.

Demand is increasing significantly. In just a few years, demand for lithium-ion batteries increased from 59 gigawatt-hours (GWh) in 2015 to 400 GWh in 2021, and that demand is forecast to increase to 600 GWh in 2022.[7] This is in turn putting increased pressure on prices, which until recently had declined steadily for years.

By one estimate, to meet growing EV demand, lithium production would have to increase sevenfold, while production of other metals would also need to grow substantially. That would entail $250 to $300 billion in capital investments in copper and nickel alone.  Unfortunately, some projections do not forecast substantial increases in the raw material. One projection has lithium pegged at only 2% to 5% growth over the next couple of years, with demand soon outstripping supply.[8]  More distressingly, some studies predict depletion of traditional lithium reserves as soon as 2038 and others out to 2050, and potentially sooner if EV demand outpaces most forecasts.[9]  

The final major challenge is the readiness of the electric grid. An NREL study projected that electricity demand could increase from 4,000 terawatt-hours (TWh) in 2020 to 5,000 TWh by 2050 in its reference case, or to as much as 7,000 TWh in a high electrification scenario. In the higher-use forecast, electricity would be as much as 35% of all energy end use.[10]

While the existing grid is resilient, this increased demand is going to necessitate additional investment in generating capacity as well as transmission and distribution. While managed charging, energy efficiency, and pricing incentives will mitigate the impacts of increased load, there will have to be some additional capacity to meet the need of this increased usage. Distributed energy resources may also help further reduce the need for capacity investments, but not all of the new load will be locally sourced, thus requiring increased spending on transmission.

As electricity demand increases, the distribution system will have to be enhanced in most locations. In a world where most of the vehicles are electric, substations and circuits will have to be upgraded to accommodate loads that are significantly higher than what the system was originally built to meet. Commercial charging could place an even greater strain on the system. Fast charging stations have demand measured in megawatts, not kilowatts, thus potentially requiring significant investment in new infrastructure at these locations.

The future may very well be electric. Indeed, the present already is more electric than most people realize. But this transformation cannot be achieved without resolving the technical and supply chain challenges, nor without significant investment in new technologies to accommodate electrified end-uses of energy. These challenges are not unsolvable, but we must take them seriously.