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Do American’s Utility Bills Reflect Abundant Cheap Power?

By / 4.6.2016

Although the price of electricity in the Eastern United States fell by half over the last decade, residential customers saw their monthly bills increase by 26 percent, according to government data. What accounts for this anti-market discrepancy?

Consumer advocates claim that power companies are using tumbling electricity costs as camouflage to increase other charges. Utilities push back, saying price hikes are necessary to pay for billions of dollars of government-mandated improvements to long-neglected infrastructure. Last year PPI held a “future grid” summit which posed this key question to the assembled experts: Who will pay for the modern grid we need? Now we may have an answer: consumers.

Electricity charges make up about a third of the average utility bill, down from around half just a few years ago. This decrease is due to a flood of cheap natural gas extracted by hydraulic fracturing, otherwise known as “fracking.” The rest of your utility bill consist of retail charges associated with delivering supplies—for example getting the electricity to the end user and adding enough capacity to handle demand surges.

Bernie Sanders may want to ban fracking, but the resulting glut of cheap gas is driving down the wholesale cost of electricity across his native Northeast. According to the U.S. Energy Information Administration, these low prices are attributable to warmer than normal temperatures, additional pipeline infrastructure, and “the generally well-supplied and low-priced natural gas environment.” Northeast regional prices for electricity are just a fraction of what they were two years ago. For example, in January peak prices for the month in New England reached only $66/MWh down from $438/MWh January two years ago. New York has similar numbers peaking at $71/MWh this year as opposed to $518/MWh two years ago.

Thanks to these low, low prices, utilities have room to pass along the costs of modernizing our outdated electricity grid to residential consumers without their bills exhibiting dramatic spikes. The rapid deployment of intermittent renewable energy resources on the U.S. power grid is partly responsible for rising delivery costs. This evolution away from large, centralized power plants toward smaller, more widely distributed generation sources means utilities must install digital sensors, meters, and more power lines, the costs of which are passed along to consumers.

According to the Edison Electric Institute, the trade association for investor-owned utilities, their member companies spend $20 billion annually on upgrades to the distribution grid alone. Without cheap natural gas electricity consumers would certainly bear a heavier share of these costs. In other words, without fracking, U.S. consumers won’t be reaping the benefits of more renewable energy and a smarter and more reliable grid. And when their electricity bills start to soar, they will really be feeling the burn.