Renewable energy, coal, and natural gas prices are pushing residential electricity prices higher in 2011 despite faltering economy
The U.S. is mired in one of the hottest summers on record. Temperatures in the three digits are wilting half the states. To combat the heat, air-conditioners and fans are cranking full blast, and people are lingering a little longer in front of open refrigerators. Such cooling respite doesn’t come cheap, though. When homeowners and landlords get their electricity bill for July, they may find their temperatures rising in a different way.
In real terms, residential electricity prices have been higher in the past, but in nominal terms they are higher than ever. Kristina Fallon, a surgical technician who rents in Lexington, S.C., says that since 2009 she has seen the monthly electricity bill for her 4,200-sq.-ft. house rise $40 to $50 each year in the summer months, despite turning up the thermostat to 80 degrees, closing curtains, and unplugging electronics when not in use. By June, the bill, which is included in her rent, had reached $218, Fallon says, and she expects it to reach $240 in August, usually the hottest month.
Monthly estimates from the U.S. Energy Information Administration show that prices of U.S. residential electricity from January to March were up 3.31 percent year on year, to 11.24¢ per kilowatt hour. Based on fuel cost increases last year, EIA expects that by the end of 2011, average annual residential prices will have risen 2.9 percent over 2010, to 11.91¢ per kilowatt hour. The growth is expected to slow to 0.6 percent in 2012.
“Increases in coal and natural gas costs last year are just now being felt by consumers,” says Tyler Hodge, an economist at EIA. The cost of coal delivered to electric generators increased 6.5 percent in 2009 and 2.6 percent last year. The delivered cost of natural gas fell nearly 50 percent in 2009 and then increased 7.3 percent in 2010, according to Hodge. EIA expects fuel costs to remain relatively stable this year, which should translate to moderate growth in electricity prices in 2012.
“We would like to see lower electricity prices and lower energy prices overall. It makes the economy function more efficiently,” says Daniel Simmons, director of state and regulatory affairs at the Institute for Energy Research, a Washington (D.C.) organization that supports free markets.
INCREASES IN THE SOUTH
“Changes in prices generally reflect variations in electricity demand, availability of different generation sources, fuel costs, and plant availability,” states EIA’s website.
The average residential price of electricity in South Carolina rose about 9.76 percent year on year in the first three months of 2011, yet the increase has been most dramatic in Tennessee, where average prices climbed 15.28 percent in the same period, to 9.58¢ per kilowatt hour, EIA estimates. Price hikes in Missouri, Hawaii, and Kentucky were the next highest, rising in each state by more than 10 percent.
Regionally, east-south-central U.S. (which includes Tennessee, Alabama, Kentucky, and Mississippi) had the biggest hike, 10.9 percent year on year from January to March. Rates fell the most in New England, dropping 3.44 percent.
While the average price in Tennessee, 9.58¢ per kilowatt hour, is below the national average of 11.24¢, bills are high as the state is one of the biggest per-capita users of electricity. Average monthly residential consumption, at 1,248 kilowatt hours per housing unit, was the second-highest in the country after Louisiana, according to EIA data from its 2009 survey, the most recent available.
Tennesseans’ average monthly electricity bill, $116.35 in 2009, was twelfth-highest in the U.S. (the national average was $104.52). Marylanders had the highest average bill, $153.72, followed by Hawaiians at $149.25. Bills were lowest in New Mexico and Utah.
COSTLY INVESTMENT IN RENEWABLES
Electricity prices typically rise in the summer, as increased use of air conditioning requires electricity suppliers to run costly plants, used only when power consumption is at its peak, in addition to normal operations to meet demand (in the winter, many places rely on other sources for heating, such as natural gas and oil). The hotter the summer, the more expensive rates can get.
While seasonality plays a role, the shift to renewable energy has also boosted rates. Renewable energy requires investment, and such energy sources are still less efficient than traditional energy sources, according to IER’s Simmons. He adds that legislators and regulators have not made reducing electricity rates a priority, as environmental concerns have become a greater concern.
Many states, such as California, require utilities to generate a certain percentage of the electricity they sell from renewable sources. Bear Valley Electric Service in Big Bear Lake, Calif., recently asked for a rate hike to cover costs related to a state law requiring that 33 percent of the electricity sold to customers come from renewable resources by 2020, reported the newspaper Big Bear Grizzly.
Last year, South Carolina Electric & Gas won approval to increase retail electricity rates 4.88 percent by July 2012, “driven primarily by costs associated with government-mandated environmental and safety initiatives,” according to a release.
NEW NUCLEAR PLANTS
Utilities are also retiring old plants and investing in new facilities. SCE&G recently requested approval from the S.C. Public Service Commission for a 2.7 percent rate increase in October to pay financing costs while two nuclear units are under construction. The units are scheduled to come on line in 2016 and 2019. Paying these costs early rather than waiting until the projects are done saves customers money in the long run, according to the company. Still, consumers have voiced frustration (there is even a Facebook page Stop the Rate Increases SCE&G).
In July, Duke Energy in Charlotte requested approval from the North Carolina Utilities Commission to increase electricity rates—residential rates would go up about 17 percent—to “begin paying the company back for the money it has already spent to retire and replace aging power plants and equipment and to comply with expanding state and federal environmental regulations,” according to a company release.
Prices of U.S. residential electricity have steadily risen since 2002, the last year rates dropped, according to the EIA. The biggest annual increase since occurred in 2006, when residential prices rose 10.3 percent. In 2010 they rose only 0.6 percent.
DEMAND FALLS, REVENUE RISES
Electric utilities’ revenue from residential customers has stayed level even as consumption has declined. U.S. residential electricity sales (in megawatt hours) fell less than 1 percent in 2008, but revenue from the residential sector increased 4.8 percent, according to EIA data. In 2009, sales fell 1 percent as revenue increased 1 percent. In 2010, both consumption and revenue increased by more than 6 percent. EIA’s most recent estimates, for the first three months of 2011, are that U.S. residential electricity sales fell about 2.6 percent year on year, as revenue grew a mere 0.73 percent. Residential sales are expected to fall 1.9 percent in 2011.
“It is not surprising that you are seeing reduced consumption” in the downturn, says Eric Boomhower, a spokesman for SCE&G. Still, the company has had to increase rates to boost capacity for expected increases in demand over the next decade, as well as to meet environmental standards, he says.
“As a regulated utility, there is no good time to raise a customer’s rates. There’s never been a worse time than in recent years, because of what is going on with the economy,” Boomhower says. “You have to find a balance between being environmentally responsible, knowing what businesses and customers can afford, and having a realistic time frame.”
Click here to see the utilities with the highest electricity rates by state.
Wong is a lifestyle and real estate reporter for Bloomberg Businessweek.
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