“The Key Drivers Of Increasing Electricity Cost”

As the world moves through an energy transition from fossil fuels to renewables, there are some inconvenient truths that are starting to appear. Other than the huge amounts of renewable energy minerals that will be required for this transition, and supply reliability and price volatility of these minerals, one key issue is the rising cost of delivered electricity to the end user.

The cost of electricity has two components: 1) production cost from the use of coal, nuclear, natural gas, HFO, diesel, solar, wind, hydro, or geothermal, and 2) the delivery (transmission, distribution) costs from generation source to the end user.

The Energy Information Administration (EIA) has analyzed the breakdown of production and distribution costs for electricity in the U.S from 2010-2020 as shown in Graph 1.

Reviewing this graph, one clear message evolves: production costs are declining while delivery costs are growing. After adjusting for inflation, major utilities spent 2.6 cents per kilowatt-hour (kWh) on electricity delivery in 2010, using 2020 dollars. In comparison, spending on delivery was 65% higher in 2020 at 4.3 cents/kWh. Conversely, utility spending on power production decreased from 6.8 cents/kWh in 2010 (using 2020 dollars) to 4.6 cents/kWh in 2020, or a 32% decrease.

Graph 1 – Major U.S. utilities annual spending by category 2010-2020

Source: U.S. Energy Information Administration, based on data from Federal Energy Regulatory Commission (FERC) Financial Reports

In real 2020 dollar terms, spending on electricity delivery increased every year as utilities worked to replace aging equipment, build transmission infrastructure to accommodate new wind and solar generation, and install new technologies such as smart meters to increase the efficiency, reliability, resilience, and security of the U.S. power grid.

In 2021, the U.S. has seen increased demand for consumer goods and the energy needed to produce them, translating to higher energy prices to fuel electric generators, especially for natural gas.

Using EIA data, the increase in natural gas prices from 1 Jan 2021 to the peak on 5 Oct 2021 was 135%, while the increase from 1 Jan 2021to 10 Dec 2021 was 45%, as shown in Graph 2. U.S. consumers of all varieties are seeing a dramatic increase in electricity production costs (and electric bills) this fall and winter due to higher natural gas market prices.

Graph 2 – Natural gas prices in U.S. for 2021

Electricity prices in Germany increased from 19.5 Euros per kWh in 2006 to 29.4 Euros per kWh in 2018, a 3.5% annual energy price increase as shown in Graph 3, as that country incented solar energy with high feed-in tariffs while experiencing higher renewable energy penetration.

Graph 3 – German electricity prices 2006-2018

Electricity prices in California rose 5 times more than in the rest of the U.S. over 2011-2017 as increased renewable energy penetration caused price inflation as shown in Graph 4. The average electricity price increase for California during this period was 3.60%, while the average price increase for the remaining 49 states was 0.67%.

Graph 4 – Electricity prices in California 2011-2017

Summary:

Increasing renewable energy (RE) penetration is driving increased delivery electricity prices
Delivery costs are increasing at a rate above the cost of generating electricity, thus producing an increase in price to the consumer
As the RE penetration increases, additional capital expenditures will be made to increase transmission/distribution assets, along with energy storage facilities to bridge the gap between intermittent solar/variable wind energy production and consumer demand
Increasing transmission/distribution costs will be passed onto consumers, (residential, commercial, and industrial), and those higher future electricity prices will be increasingly painful to be absorbed by the poorer segments of all countries.