Expect Higher Electricity Prices

State and federal governments keep tampering with electricity markets to make them “greener,” and the result is higher electricity prices for American consumers.  More than half of the U.S. states have an electricity mandate that requires a certain amount of electricity to come from qualified renewable electricity generators, most of which are wind or solar.[i] Because renewable technologies cost more than traditional coal and natural gas-fired technologies, electricity prices are higher in the states with electricity mandates.

The Environmental Protection Agency (EPA) is setting environmental standards that make older coal, oil and gas steam plants uneconomic to operate. Since the older units are completely paid for, their operating costs are limited to fuel, administrative and maintenance costs. To replace them, new power plants will be needed, costing the rate payers more. Estimates vary as to how many units will be retired depending on the methodology used and how many of EPA’s new rules are considered but IER’s analysis shows that 30 gigawatts of generating capacity may retire.

Residential Electricity Prices

Between 2005 and 2010, residential electricity prices increased by 23 percent from a national average of 9.45 cents per kilowatt hour in 2005 to 11.58 cents per kilowatt in 2010.  And the increasing trend in electricity prices is continuing in 2011. For the first 8 months of 2011, residential electricity prices were 1.8 percent higher than for the same period in 2010.[ii] Though the latter increase may be about the rate of inflation, inflationary costs were absorbed by utilities between 2009 and 2010 when national average residential electricity prices were nearly flat.

Among the states, Hawaii and Connecticut have the highest electricity prices while states in the Northwest with inexpensive hydroelectric power have the lowest prices. Hawaii’s average price for residential electricity was 28.1 cent per kilowatt hour in 2010, while Connecticut’s was 19.3 cents per kilowatt hour. The least expensive residential state electricity prices in 2010 were in Idaho at 7.95 cents per kilowatt hour and in Washington State at 7.98 cents per kilowatt hour.[iii]

Effect of State Clean Energy Programs on Electricity Prices

States with renewable electricity standards have 38 percent higher electricity prices than other states.[iv] Those states tend to also have other state programs like quasi-deregulated electric generation markets where the state provisions for implementation dictate how prices for power are calculated.

Electricity prices also differ greatly by location and the generator types that produce the electricity. The lowest prices are in the Northwest where hydroelectric power is dominant. Electricity prices are high in the Northeast, such as in New York City, where electricity prices are around 26 cents per kilowatt hour due to high taxes, limits on generating fuels, and the cost of maintaining an underground transmission system.[v]

The Beacon Hill Institute of Suffolk University performed a number of state studies dealing with renewable and efficiency programs. They estimated that:

• Green Energy Programs in Massachusetts would increase average electricity prices by 2.6 cents per kilowatt hour by 2020, with a total cost of $9.8 billion (2010 dollars) for the 11-year period from 2010 to 2020. The mandated renewable electricity standard in Massachusetts represents 27 percent of the estimated total cost.[vi]
• New Jersey’s Offshore Wind Economic Development Act requiring at least 1,100 megawatts of qualified offshore wind capacity would increase state electricity prices by 2.1 percent in 2017, lose an average of 2,219 jobs, and cause real disposable income to fall $330 million and net investment to fall by $48 million (2011 dollars).[vii]
• North Carolina’s renewable electricity standard is expected to reduce real disposable income by $56.8 million and lose 3,592 jobs by 2021.[viii]
• New Mexico’s renewable electricity standard is expected to cost $2.3 billion and lose over 2,800 jobs by 2020.[ix]

EPA’s New Environmental Rules Will Affect Electricity Prices

The impact of EPA’s latest environmental regulations is expected to be the greatest in the Midwest and in the coal belt where dozens of units probably will be retired. Kentucky Utilities estimates that it will cost $800 million to replace the units it will need to retire and $1.1 billion to upgrade other units to meet the standards. A 14 percent rate increase will be needed to cover those costs.[x]

Duke Energy in North Carolina recently requested a 17 percent increase in rates to replace old plants and to make the transmission system more reliable. North Carolina agreed to a 7.2 percent increase.  To finance the new natural gas technologies needed to replace its old coal-fired units, Duke Energy will need to request another increase next year.[xi]

Retiring old coal plants will also result in loss of property taxes and state revenues. In Salem, Massachusetts, for example, Dominion plans to retire two units later this year, halving the plant’s employment and reducing its $4.75 million tax bill. In the short term, the state is expected to make up   for the tax loss to Salem, which relies on tourist trade for income.[xii]

EPA estimates that industry will spend $11 billion by 2016 to comply with its toxic and air transport rules.[xiii]

Conclusion

Federal and state governments are setting mandates and regulating industry causing increases in electricity prices to consumers and increased costs to tax payers for monitoring compliance. While EPA’s new regulations are promulgated to reduce pollution, EPA’s website shows that aggregate emissions of six common pollutants that they want to reduce further have already declined by 67 percent between 1980 and 2010 due to regulations currently on the books. As the Beacon Hill Institute has found in its analyses, State renewable energy mandates are costing jobs and reducing real disposable income.  Policy-makers need to ask whether the benefits of regulations and mandates exceed their costs as well as how much more they think Americans can afford to spend on electricity, which is a fundamental component of a high quality of life.