U.S. Electricity Prices Surge Amid Grid Strains and Rising Demand

• Over the past year, electricity price inflation has outpaced total consumer inflation in the United States.
• U.S. utilities and regulators have raised significantly their forecasts of peak power demand in the coming decade.
• The expected higher expenditures, as well as the higher costs of replacing outdated equipment and higher interest rates, have prompted some utilities to seek permission from regulators to raise ratepayer rates.

U.S. consumers are set to pay higher electricity bills as power providers raise investments in much-needed grid improvements amid an old power system that is not designed to cope with soaring demand and more frequent extreme weather events.   

Over the past year, electricity price inflation has outpaced total consumer inflation in the United States.  

While encouraging signs have emerged that the Fed is winning some of the battle with high overall inflation, prices for electricity are set to continue rising in the coming years due to increasing demand and challenges in building transmission capacity.

Utilities, for their part, are waking up to the fact that U.S. power demand is soaring after a decade of flat-lining consumption, and that they cannot remain complacent. 

Rising Spending on Grid Reliability

U.S. utilities and regulators have raised significantly their forecasts of peak power demand in the coming decade, as both expect exponential growth in electricity demand from data centers and new technologies such as generative AI.

Some of the biggest U.S. utilities have bumped up their forecasts for short and long-term demand growth and peak demand and are planning higher spending to meet rising consumption.

As power demand grows, the share of renewables rises, and extreme weather events such as heat waves and winter freezes become more frequent, electric utilities say that the U.S. grid reliability will need significant spending, more than the expenditures in previous decades. Updating and modernizing the grid needs a lot of investment, and utilities will pass on part of these costs to consumers.

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Investments that have been pushed back in recent years have now become urgently needed to address grid reliability issues and expand the transmission infrastructure to meet growing demand and accommodate more solar and wind power in the system.

“The problem that we have right now comes from decades of lack of investment,” Pedro Azagra, chief executive at Avangrid, which operates utilities in New England and New York, told The Wall Street Journal.

“You cannot catch up in one minute,” added the executive, who said that Avangrid has hiked expenditures to address challenges in grid reliability.

The expected higher expenditures, as well as the higher costs of replacing outdated equipment and higher interest rates, have prompted some utilities to seek permission from regulators to raise ratepayer rates.

As a result, the electricity bills are set to increase in the coming years.

Over the past 12 months, electricity prices in the United States rose by 4.4%, compared to an all-item inflation of 3.0%, according to the latest CPI data from the Bureau of Labor Statistics.

Rising Consumer Rates

According to the Electricity Transmission Competition Coalition, “the price of electricity continues to increase due to accelerating transmission costs that are not subject to competition.”

“Less than 10% of all transmission projects are competitively bid,” ETCC said in May this year. 

The U.S. Energy Information Administration (EIA) also notes that transmission and distribution costs continue to rise, although electricity generation costs are declining.

“As supply costs are decreasing, another portion of retail electricity prices, the cost for transmission and distribution, has risen as companies have developed new infrastructure or have replaced existing infrastructure to help integrate expanding renewable generation,” the EIA said in its forecast of residential electricity prices for this summer.

“Transmission and distribution costs have been one of the major drivers for increases in retail electricity prices in recent years,” according to the administration.

These costs cannot be avoided if utilities want a reliable grid amid rising demand and extreme weather events.

Last year, 17 states, primarily across the middle of the U.S., benefitted from electricity rate reductions, but 33 states and the District of Columbia saw higher rates in 2023, the U.S. Chamber of Commerce said earlier this year.

“Often, areas with the highest rates also have regulatory and permitting challenges that limit available resources and constrain electricity supply,” wrote Heath Knakmuhs, Vice President and Policy Counsel, Global Energy Institute, U.S. Chamber of Commerce.

Knakmuhs reckons that “upward pressures on electricity prices are likely to continue thanks to increasing demand, plant retirements driven by aggressive regulations, and ongoing difficulty building transmission capacity, pipelines, and other supporting infrastructure.”

The expected surge in power demand due to data centers working with AI is putting pressure on utilities to invest more in updating the infrastructure and meeting higher peak demand levels than what companies and regulators were forecasting just two years ago.

For example, consulting firm Grid Strategies published a report earlier this year analyzing data from utilities’ regulatory findings. The analysis found that over the past year, grid planners nearly doubled the 5-year load growth forecast, the key drivers being investment in new manufacturing, industrial, and data center facilities.

“The U.S. electric grid is not prepared for significant load growth,” Grid Strategies said in the report, noting that a recent “surge in data center and industrial development caused sudden, shockingly large increases in 5-year load growth expectations.”

By Tsvetana Paraskova for Oilprice.com

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