Why are electricity prices surging?

(NewsNation) — While food inflation has eased in recent months, another household essential, electricity, is heading in the wrong direction, outpacing overall inflation.

The rising cost of electricity has hit Americans especially hard in recent years, with prices up 5% compared to a year ago and roughly 30% since 2021, according to the Consumer Price Index (CPI).

A recent LendingTree survey found nearly a third of Americans have cut back or skipped expenses to pay for utilities in the past year.

Experts say the electric bill surge is due to several factors, but much of it can be attributed to massive investments in the country’s aging energy infrastructure.

“We’re spending a lot more money, a lot more capital, on hardening the grid, on replacing equipment,” said Ed Hirs, an energy fellow at the University of Houston.

As the nation transitions from fossil fuels to renewables, utility companies are spending billions to modernize grids. At the same time, utility providers are working to increase generation capacity to keep up with higher demand that will stem, in part, from artificial intelligence, Hirs noted.

The threat of extreme weather events has also factored into recent investments. Last year, for example, California regulators gave Pacific Gas & Electric (PG&E) approval to bury 1,230 miles of power lines to reduce wildfire risk. PG&E customers have already seen two rate hikes this year.

In Oregon, Portland General Electric also cited wildfire and weather-related investments to explain its rate increase in January.

From 2022 to 2024, total spending by investor-owned electric utilities is projected to jump by 11% to $167 billion, according to the Edison Electric Institute.

Investments in transmission and distribution together account for more than half of a typical family’s utility bill, said Tyson Slocum, the energy program director at consumer advocacy nonprofit Public Citizen.

To make matters worse, the boost in capital expenditures is occurring at the same time interest rates and labor costs are up, which ultimately gets passed on to customers.

A spike in natural gas prices — and subsequent rise in U.S. exports — following Russia’s invasion of Ukraine has also contributed to higher electric bills in recent years, Slocum pointed out.

“Typically, there’s a delay in the spike in wholesale price of natural gas and the point at which that spike in price finds its way into your monthly utility bill,” he said.

Roughly 40% of the nation’s electricity still comes from natural gas, and those prices have come down recently, which means they could be less of a factor in driving up electric bills over the next year.

The green future and a surge in demand

The nationwide shift toward renewable energy comes with a significant upfront cost. Solar and wind farms are still more expensive to build than natural gas-fired generators, although construction costs for all three have fallen in recent years.

Expanding wind and solar will also require new transmission infrastructure.

“We can’t build large solar farms in downtown Chicago or downtown Houston or downtown Boston. These have to be built in rural areas and transmission lines need to be constructed,” Hirs said.

Utility customers are feeling the brunt of those investments now, but over the long run, those same sources offer financial advantages, namely, they can generate lower-cost power with less price volatility.

However, higher future demand presents a growing challenge.

By 2030, data centers could account for 7.5% of U.S. electricity consumption, up from 2.5% in 2022, according to the Boston Consulting Group.

That acceleration has been fueled by the rise of artificial intelligence. AI’s demand for power in the U.S. could end up being five to six times the total amount needed to charge America’s electric vehicles, The Wall Street Journal reported.

Hirs said the growth in AI data centers — not EVs — is now the “greatest concern” for grid planners.

The increase in commercial demand could coincide with a rise in demand at home, which is expected to go up by almost 4% in 2024 due to hotter summer temperatures.

To improve reliability and avoid rolling blackouts, the North American Electric Reliability Corporation (NERC) has recommended expanding the transmission network, adding new power sources and making existing resources more dependable.

All of that will take time and money, which means higher electric bills for consumers, at least for now.

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