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