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What's Causing Electricity Costs to Rise?
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The Costs to Generate Electricity Are Rising
Electric companies use a diverse mix of fuels to generate electricity. Fuel prices greatly affect the price of electricity. An important long-term solution to high fuel costs is to maintain the diversity of our nation’s available fuel resources to ensure that we do not become too dependent on one fuel source. But, this requires higher capital costs and new infrastructure investments.
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Demand for Electricity Is Growing
While efficiency improvements have had a major impact in meeting national electricity needs relative to new supply, the demand for electricity continues to increase. According to the U.S. Department of Energy’s Energy Information Administration (EIA), electricity consumption is expected to increase by at least 40 percent by 2030. According to EIA, 258 gigawatts (GW) of new generating capacity will be needed by 2030 to meet the growing demand for electricity, at a cost of approximately $412 billion (in 2005 dollars). This is equivalent to approximately 250-500 new baseload power plants (rated between ½ and 1 GW each).
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Infrastructure Investment Costs Are Growing
Electric utilities must reinforce the nation’s electricity delivery infrastructure—high-voltage transmission lines, substations, and distribution systems. From 2000 to 2005, electric utilities invested more than $28 billion in the nation's transmission system, and are planning to invest an additional $31.5 billion from 2006 to 2009—nearly a 60-percent increase from the 2002-2005 time period. In addition, electric utilities will spend an average of $14 billion per year over the next 10 years on distribution investment.
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Environmental Compliance Costs Are Significant
All electric utilities are subject to hundreds of environmental rules, including dozens of federal and state air and water quality requirements created in the wake of the Clean Air Act and Clean Water Act. From 2002-2005, the electric power industry as a whole spent at least $21 billion on compliance with federal environmental laws; state and local rules drive that total even higher. According to the U.S. Environmental Protection Agency, complying with two new federal regulations—the Clean Air Interstate Rule and the Clean Air Mercury Rule, which are aimed at further reducing power plant emissions of nitrogen oxides (NOX), sulfur dioxide (SO2), and mercury—will cost the electric utility industry $47.8 billion between the years 2007 to 2025.
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Price Caps Set During Industry Restructuring Are Expiring
As part of the transition to competition, many state policymakers decreed that customers’ bills would be frozen, and in many cases reduced, typically for a period ranging from two to ten years. The first rate caps were put in place in 1997, and the last are set to expire in 2011. As rate freezes and reductions are being phased out, many customers perceive that their rates are being "increased" when in fact they are gradually reflecting the costs already incurred by utilities.
What Are Electric Utilities Doing To Help Control Prices?
Electric utilities are taking steps to help shield customers from rising fuel costs. Many electric utilities try to "hedge" or enter into long-term, fixed contracts for fuel at set prices. However, not all companies have this option, and such forward contracts cannot cover all fuel needs.
Utilities have increased the productivity (capacity factors) of their power plants while at the same time decreasing their operations and maintenance costs. Electric utilities also have taken a leading role in developing energy efficiency and demand response programs for residential, commercial, and industrial customers. In fact, between 1989 and 2005, electric utility efficiency programs saved almost 797 billion kilowatt-hours of electricity—enough electricity to power nearly 74 million average U.S. homes for one year.
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