Americans can expect higher energy prices as U.S. electric utilities plan their biggest spending increases in decades to upgrade electric grids, preparing for increased demand from electric vehicles and making the transition to renewable energy. Utilities plan to spend tens of billions of dollars in the coming years to reduce carbon dioxide emissions, partly in response to state and federal mandates, and to replace infrastructure that cannot meet the needs of President Joe Biden’s energy transition. The Edison Electric Institute, an industry trade group, expects that utilities will invest about $140 billion each year in 2022 and 2023—substantially more than any year since 2000. The investments are needed to meet renewable-energy goals set by President Biden and some states and to bolster the reliability of the grid as outages become longer and more frequent mainly due to intermittent renewables that cannot always meet demand when required and aging infrastructure. Changing the grid and the generation sources from on-demand to intermittent sources with backup will be expensive. Europe is already experiencing this price spike.
Utilities must also prepare for higher electricity demand because of electric vehicle sales goals, homeowners needing the grid to charge them, and replacement of traditional furnaces and gas appliances with electric alternatives. The movement toward electrification is driven by cities, towns, and some states as part of a campaign led by the environmental group the Rocky Mountain Institute, to phase out natural gas for cooking and heating. Because utilities are allowed to recoup the cost of capital investments, and obtain a rate of return on them, Americans can expect higher electric bills.
This occurs as U.S. electricity customers face some of the largest bills in years as President Biden’s policies move the United States to renewable energy and electric vehicle adoption. Average retail electricity prices for residential customers increased 4.3 percent last year to 13.72 cents per kilowatt-hour, the largest annual increase since 2008, according to the Energy Information Administration. Biden is following in the shoes of California whose electricity prices have increased to record highs (70 percent higher than the national average) as it implements its renewable agenda and its electric vehicle goals. Recently, California has mandated 35 percent of new passenger vehicles sold in the state by 2026 to be powered by batteries or hydrogen.
California’s Dilemma
Southern California Edison, a unit of Edison International that serves about five million electricity customers, is planning to invest as much as $30 billion in its system between 2021 and 2025 to implement wildfire control methods and equipment, prepare the grid for greater electricity demand, and build large batteries to store wind and solar power and discharge it as needed. That equates to $6,000 per customer before return on capital investment. California plans to decarbonize its power grid by 2045, which will require the state’s utilities to procure an unprecedented amount of new renewable generation and battery storage. Electrification of California’s largest-in-the-nation vehicle fleet will exacerbate these problems.
The California Public Utilities Commission has ordered utilities to buy renewable energy and battery storage as the state phases out four natural-gas-fired power plants and retires Diablo Canyon, the state’s last two nuclear reactors, with a combined capacity of 2,250 megawatts, in 2024 and 2025, respectively. The order requires companies to bring more than 14,000 megawatts of power generation and storage capacity online in the coming years—an amount equal to about a third of the state’s forecast for peak summer demand.
The California Energy Commission and the state’s grid operator are concerned that the purchases may not be enough to prevent electricity shortages in coming summers. A drought has constrained the output of some of California’s most significant generating facilities, including the Hoover Dam. Neighboring states are closing their coal-fired power plants, reducing the amount of electricity California can import when high temperatures increase electricity demand. California’s closure of four gas-fired power plants on its southern coast will exasperate the problem as they supply more than 3,700 megawatts. Regulators moved to keep three of them on-line through 2023 because the state could face electricity shortages on hot days in the evening, when solar power production declines.
California’s grid operator called on residents to conserve power several times in the past and took emergency measures to buy additional supplies from regional producers to reduce the risk of blackouts. The state also added four temporary natural-gas generators at power plants to help alleviate shortages.
The California utilities commission in late 2019 ordered the state’s power companies to contract for 3,300 megawatts of new generation by 2023. The utilities commission last year ordered them to bring more than three times as much capacity online between 2023 and 2026. The procurement order, the largest the agency has ever issued, calls for 11,500 megawatts of wind and solar generation, battery storage and other carbon-free resources. It is expected to cost billions of dollars, much of which the state’s utilities will recoup from customers.
In 2019, Southern California Edison estimated that California’s goal to reach carbon neutrality by 2045 could require up to $250 billion in statewide investments in renewables and storage and grid enhancements. That pre-COVID number, however, may be well short of what it will take. According to a new report from LevelTen Energy, North American renewable energy developers are struggling to build solar and wind projects fast enough to keep up with demand because of the extremely difficult development landscape, which is leading to a shortage of power purchase agreements for corporations and other large energy buyers. This rapidly growing imbalance between supply and demand combined with skyrocketing development costs raised renewable costs by 28.5 percent in one year.
Moreover, minerals necessary for a green transition have skyrocketed in price recently, with 500+ percent increases in the price for lithium carbonate used in batteries, with price spikes for copper and aluminum, along with other minerals. The price and availability of these will affect the prices of these new investments, and in turn, utility bills.
Conclusion
California’s energy dilemma underscores the difficulties of rapidly transitioning to renewable energy resources, as the leaders of the United States and many countries are now pledging to do. The transition will require large investments by electric utility companies in infrastructure, which will be tacked onto electric utility energy bills consumers pay. More renewable energy added to the grid means more transmission lines will be needed to reach wind and solar resources located farther and farther from demand centers. Greater demand for electricity from electric vehicles will require more solar and wind energy and battery storage requirements to discharge power when the wind is not blowing and the sun is not shining. The energy transition demanded by President Biden will cost Americans through much higher energy bills, as Americans are already seeing from his anti-oil and gas policies. It is just not clear how much the total package will be.
