Rising Cost Of Electricity

The issue

As with virtually all other goods, the price of electricity has risen over the years. Underlying factors affecting this upward trend include higher prices for generating fuel (e.g. coal), the need for new infrastructure, and environmental concerns. Compared to other goods, the increase in electricity prices has been relatively low.

More recently, this trend has reversed, due largely to poor economic conditions. However, it is expected that once the economy recovers, electricity demand and prices will once again climb.

How we got to this point

Current market condition notwithstanding, the price of electricity has been rising. 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.

Average Retail Price of Electricity for Various Customer Classes
U.S Residential Electricity Price
*Data from U.S. Energy Information Administration 06/11

One factor affecting electricity prices is aging infrastructure that will need to be replaced or updated to accommodate the integration of renewables to the electric grid. Often, the areas where renewable energy is located are far from the load centers craving the energy. Additionally, though there is no cost for fuel sources such as wind and solar, constructing and maintaining these relatively new technologies is costly.

Another determining factor in electric rates will be the generation mix used in future years. The uncertainty of today’s regulatory environment makes it difficult to predict future capacity planning decisions. Costs for technologies such as those used in coal generation, which is already capital intensive, may be increased by impending greenhouse gas legislation. This would cause electricity prices to rise as coal units would have to be either replaced or updated to conform to new environmental standards. Another effect of this probable GHG legislation is the current “dash to gas”. Natural gas plants are faster to site and build than other base load generation. Realizing that natural gas also is less carbon intensive than coal, many companies are shifting this direction. However, even though the plants are relatively easy to site and cheap to build, natural gas, as a fuel source, has a history of price volatility.

The cost of capital has also risen as utility bond ratings have declined over time. When capital costs increase, so does the amount that consumers see on their monthly bills.

Despite short-term decreases due to weak economic conditions, rates of demand are going projected to continue to rise over time, requiring capacity additions in the future which will be more costly that existing generation assets.

What the industry says

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.

Levelized Electricity Costs for New Power Plants, 2020 and 2035 (2008 cents/kWh)
Levelized Electricity Costs for New Power Plants, 2020 and 2035 (2008 cents/kWh)
(2020 data = top grouping; 2035 data = bottom grouping)
SOURCE: U.S. Energy Information Administration, Annual Energy Outlook 2010