Cost of Electricity

As with virtually all goods, the price of electricity has risen over the years. Compared to other goods, the increase in electricity prices has been relatively low. Underlying factors affecting the trend include prices for generating fuel, the need for new infrastructure and environmental regulations.

Changes in Electricity Prices Compared to Other Consumer Products

Increase in cost of selected consumer goods
Sources: U.S. Department of Labor, Bureau of Labor Statistics (BLS), and U.S. Department of Energy, Energy Information Administration (EIA). April 2016

In its report, Transforming America’s Power Industry: The Investment Challenge 2010-2030, The Brattle Group cited industry investment needs in the range of $1.5 trillion:

  • $505 billion for new generation, assuming no changes in a national carbon policy or forecasted energy-efficiency improvements.
  • $298 billion for the nation’s transmission system.
  • $582 billion for distribution systems.
  • $85 billion for advanced metering infrastructure and energy efficiency/demand response programs.

At the most basic level, the price of electricity is based upon three components — generation, transmission, and distribution costs. Within these three factors are a myriad of other variables that must be taken into consideration when formulating the end-user cost of electricity.

Some factors affecting electric rates include:

  • The technology and fuel costs associated with generation mix.
  • Integration of renewable energy sources, which are often isolated from load centers. This proposition is costly despite the lack of fuel costs.
  • Environmental regulations, which result in coal plants either retiring or undergoing expensive capital-intensive retrofits.
  • Infrastructure upgrades.
  • Grid hardening.

Average Retail Price of Electricity Monthly
cents per

Average Retail Price of Electricity Monthly
Sources: U.S. Energy Information Administration

Due to new regulations and low prices, utilities are dashing to site and build natural gas plants to replace retiring coal units. However, as a fuel source, natural gas has a history of price volatility.

Additionally, infrastructure expansion is needed to accommodate the increased gas capacity expected to come online in the near future.

Lastly, the cost of capital has also risen as utility bond ratings have declined over time. When capital costs increase, so do consumers’ monthly bills.

AEP Position

Electricity pricing is not only a concern to end-use customers but also to utility companies, regulators, and policy makers. Ensuring that affordable and reliable electric service is available is at the core of the industry.