Decoding rising electricity prices

Electricity prices have risen by nearly 20% since the beginning of 2021. And the resulting blame game often points at recent policies and regulations bolstering clean energy.

But a report released today by the think tank Energy Innovation outlines the true culprits — and why clean energy isn’t among them.

• The top line: The spike in electricity prices has been caused by a combination of factors that include natural gas price volatility and rising transmission and distribution costs, and that vary from state to state. In addition, the report notes that the substantial rise in costs has on average kept pace with economy-wide inflation, which has driven prices up nearly 20% since 2021.
• The market grounding: Power prices have become increasingly politicized. High electricity rates in states like California and Massachusetts have been used as examples of the consequences of too much climate action too soon, for instance. And those opposing tighter regulation such as the recently finalized rules to reduce pollution from fossil fuel-fired power plants have claimed that they’re bound to put additional strain on energy affordability. 
• The current take: Brendan Pierpont, the report’s author, said that not only is clean energy not to blame for higher electricity bills, but that customers in states that have invested in it are already seeing some benefits on their electricity bills. “The states that have built the most clean energy, places like Iowa, Kansas, and New Mexico, have seen lower increases in rates overall,” he told Latitude Media. “They lowered their exposure to fossil fuel costs, and helped bring cheaper energy into the system.”

‍

California, which has seen rates increase more than twice the rate of inflation between 2021 and 2023, is a good example of what Pierpont says is a “misattribution of what’s driving the costs.”

In fact, it’s wildfire costs that are inflating utility bills in the state, not its rapid deployment of clean electricity. For the state’s three main investor-owned utilities, grid investments, wildfire mitigation, and insurance costs together account for 16% of customers’ total costs, according to the report.

Also, California experienced high natural gas prices in late 2022 and early 2023, which has contributed further to rising costs.

Natural gas 

Contrary to the message of many clean energy skeptics, it is the price volatility of natural gas that actually contributes far more to higher electricity costs.

This is especially true in New England, where 49% of the 2023 electricity demand was met by natural gas, according to the report. Massachusetts, one of the states with the highest rate of increase in electricity rates, had 64% of its electricity generated by natural gas in 2023. 

Natural gas price volatility has been found to coincide with long-term increases in both retail electricity rates and residential customers’ bills.

As an example, Pierpont pointed to winter storm Uri, which hit Oklahoma in early 2021 and made natural gas prices jump to levels over 100 times higher than usual, resulting in over $4.5 billion in extra fuel costs. The impacted utility will recover those costs — resulting from the events of just a single week — by increasing residential customers’ bills by around four dollars a month for the next 25 years. 

The other suspects 

Meanwhile, an estimated 60% of transmission and distribution lines are operating near or past the end of their useful life, and utilities have been spending a lot to modernize grid infrastructure.

Capital investment by investor-owned utilities, the report found, has increased from $53 billion in 2016 to around $87 billion in 2023, a 64% increase. That jump is reflected in the costs to consumers. 

“That investment has generally been focused on smaller local projects: replacing aging equipment and making infrastructure more resilient to extreme weather and climate impacts,” Pierpont said. “It hasn’t been the large-scale transmission investment that's needed to unlock lower costs and clean energy resources.” 

In fact, the report notes that utilities have put a lot of money in costly, aging coal-fired plants, even as they become increasingly unappealing, and uncompetitive, as clean energy becomes cheaper. 

Both these factors reflect an underlying issue, Pierpont said: most US utilities are incentivized to invest large sums in significant infrastructure rather than smaller investments in energy efficiency because that’s where their business model enables them to earn a regulated rate of return.

This “may contribute to rapidly rising transmission and distribution costs, high levels of capital investment in aging coal plants, and more,” the report found.

But clean energy, ultimately, is not to blame. 

“Clean energy is cheap and getting cheaper,” Pierpont said. “The challenge is ensuring utilities can harness these resources and get the best deal for their customers.”