Electricity rates not falling along with fuel costs

Published: Thursday | July 12, 2012 Comments 0
Jamaica is hoping to establish a floating LNG barge like this one found on the website of the US Federal Energy Regulatory Commission, posted courtesy of www.lngoneworld.com.
Jamaica is hoping to establish a floating LNG barge like this one found on the website of the US Federal Energy Regulatory Commission, posted courtesy of www.lngoneworld.com.

A plunge in the price of natural gas has made it cheaper for utilities to produce electricity. But the savings aren't translating to lower rates for customers. Instead, United States electricity prices are going up.

Electricity prices are forecast to rise slightly this summer. But any increase is noteworthy because natural gas, which is used to produce nearly a third of the country's power, is 43 per cent cheaper than a year ago. A long-term downward trend in power prices could be starting to reverse, analysts say.

"It's caused us to scratch our heads," says Tyler Hodge, an analyst at the Energy Department who studies electricity prices.

The recent heat wave that gripped much of the country increased demand for power as families cranked up their air conditioners. And that may boost some June utility bills. But the nationwide rise in electricity prices is attributable to other factors, analysts say:

In many states, retail electricity rates are set by regulators every few years. As a result, lower power costs haven't yet made their way to customers.

Utilities often lock in their costs for natural gas and other fuels years in advance. That helps protect customers when fuel prices spike, but it prevents customers from reaping the benefits of a price drop.

The cost of actually delivering electricity, which accounts for 40 per cent of a customer's bill on average, has been rising fast. That has eaten up any potential savings from the production of electricity.

Utilities are building transmission lines, installing new equipment and fixing up power plants after what analysts say has been years of underinvestment.

This may reverse what has been a gradual decline in retail electricity prices. Adjusted for inflation, the average retail electricity price has been drifting mostly lower since 1984, when it was 16.7 cents per kilowatt-hour.

"The ratepayer is going to have to foot the bill," says David Wright, vice-chairman of the South Carolina Public Service Commission and president of the National Association of Regulatory Commissioners.

PRICE INCREASE EXPECTED

The average US residential electricity price is expected to be 12.4 cents per kilowatt hour for the June-to-August period, up 2.4 per cent from the same time last year. For the full year, electricity prices are expected to rise two per cent.

In a typical summer month, that would mean an extra $3 on a residential bill, which includes the cost of generating the power and delivering it to a home, plus local taxes and fees.

Electricity pricing is complicated, and it differs from state to state. In states where power providers are allowed to compete, such as Texas, Pennsylvania and New York, customers can shop around for cheaper electricity, although delivery charges are still set by regulators.

Natural gas has plummeted in price because of a dramatic increase in US gas production over the past few years and a warm winter that allowed supplies to build up.

Even though coal accounts for 38 per cent of all power produced in the US, natural gas plays an outsized role in determining the price of electricity.

The price paid for electricity from the last power plant fired up to meet demand at any given moment is what sets the wholesale price for a given region. And since gas-fired power plants are usually the most expensive, they tend to be fired up last.

- AP

 

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