Will Electricity Prices Ever Stop Rising?
by Bob Shively, Enerdynamics President and Lead Facilitator
The electricity sector is experiencing notable price increases that are causing concerns about affordability. According to data from the Energy Information Administration, overall U.S. electricity prices rose by an annual average of 2.5% over the last decade but accelerated starting in 2019. Over the last five years, prices have increased by an average of 4.7% per year. This exceeded inflation, which rose by 3.8%. A survey conducted by the Smart Energy Consumer Collaborative in 2023 found that 25% of all Americans, and 34% of those earning under $50,000 per year, reported struggling to pay their electric bills over the past 12 months. Using information from a recent Lawrence Berkeley National Laboratory (LBNL) analysis, let's look at what's driving these changes.
Why costs are going up
Key factors contributing to the price increases include fuel and purchased power, operations and maintenance, and utility capital expenditures. These have all risen faster than inflation since 2019. The LBNL analysis noted the following:
- Fuel and purchased power costs typically make up 30 to 40% of utility costs. These were responsible for half of the price increase since 2019. Most of the increase is due to volatility in natural gas prices. With falling gas prices this impact has been reduced in the last two years. In regions with high percentages of hydro, renewables, or nuclear power the impact of gas prices is muted. But it is still significant since gas generation is typically the marginal source of supply. Fuel and purchased power costs are typically directly reflected in rates.
- Operations and maintenance (O&M) costs are the next largest category of utility costs. These include generation, transmission, distribution, and other ongoing costs. Both transmission and distribution O&M costs have exceeded inflation in the last five years. Especially significant is the increase in distribution costs. These costs have grown most notably in the West. Wildfire mitigation and recovery have had a significant impact, as have labor costs. O&M costs are typically directly reflected in rates.
- Utility capital expenditures, particularly in distribution infrastructure, have grown substantially - up 50% from 2019 to 2023. This reflects investments in grid modernization, reliability improvements, and adaptation to distributed energy resources. Generation capital expenditures have declined over this period. Capital expenditures impact rates through depreciation, debt costs, and return on equity costs. Increased capital spending has a significant impact on rates.
Total electricity sales have been relatively flat from 2019 to 2024 increasing on average by less than 1% per year. Factors muting net load growth include limited economic growth, energy efficiency, and rooftop solar generation. This means higher costs are spread over static loads, resulting in higher rates.
Looking ahead
The electricity industry is in a period of significant transition with traditional infrastructure investment needs coinciding with new challenges from the growth of electrification, distributed energy resources, electric vehicles, and huge data centers. At the same time, climate change is requiring investment to maintain reliability and make our electric grids more resilient to extreme weather events.
The key challenge ahead will be managing necessary investments while maintaining affordability for customers. One possible advantage will be expected load growth. With electrification of heating loads, growing use of electric vehicles, and unprecedented expansion of data center loads utilities will be able to spread costs across more usage. But this effect will only mitigate price increases if investments in new infrastructure to serve these loads are properly assigned to the customers that cause the need to invest.
Managing affordability will require efficient spending, careful consideration of how new technologies and loads can best be served, new approaches to system design, and innovative ratemaking. This will require cooperation among utilities, regulators, non-regulated service providers and customers as we continue navigating this period of industry transformation.
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