Electricity rates that grow faster than inflation
Rate growth varies substantially across the US
Residential electricity rates remind me of gas prices. Electricity at your home is a highly visible cost that feels like it should be a controllable expense for families but it isn’t. When rates increase, demand stays more or less the same and everyone complains. Some folks even change how they vote based on if their electric bill went up. I decided to look into electricity rates across the US and see what we can learn from where prices are high. It is time to change how we bill for residential electricity.
What makes an electric bill high?
Residential electricity rates have been rising faster than inflation for two decades in the US. The CPI Inflation Calculator has prices about 60% higher from 2000 to 2024 but electricity rates nationwide have gone up 73% in that same time. Different states have had different demands and strategies, so it makes sense to look at some specific states and compare them to the national average.
Texas and California have both made astounding investments in renewables but their trends look completely different. Texas spiked above average from 2005-2010 but prices have come down since then and stayed below average. California was always higher but started exploding in price with the onset of COVID-19 in 2020 and rampant wildfires. There appears to be no relief in sight. Virginia is the world’s data center capital and has shown a consistently below-average electricity rate for residents. North Carolina has had a population explosion and a transition from coal to natural gas and solar that has barely shown a blip in prices.
Tracking to the midwest US there is a much different story with the monthly tracking. Wind power has been driving prices for Iowa and North Dakota for two decades as you can see the prices fluctuate seasonally, lower in the winter with the wind blowing hard and higher in the relatively calmer summer. On the other hand, Pennsylvania has had a huge dependence on nuclear, coal, and natural gas. Prices there have consistently stayed above the national average.
All of this is to say there’s no single correlating factor to what makes residential electricity rates go up or down. The causes appear to be highly localized and unrelated to the clean energy transition, though the wind-heavy states could use some balancing with solar to complement their wind power.
Levers of control
Residential rates are a complicated topic, but there are a few levers to pull to bring them down. From a piece in PV Magazine:
Texas was also already uniquely well-suited to integrate a VPP program, said King, as ERCOT is already able to value an avoided kWh of electricity, or a dispatched one. This type of valuation is enabled by Texas’ deregulated market, which allow various resources to participate in the market more freely than utilities in other major markets.
Texas has only just begun its VPP enrollment and already has a combined 23 MW of flexible capacity online. King said that VPP compensation for homeowners is “the closest thing to a free lunch,” and that once further program requirements are ironed out, growth will be “exponential.”
As for other states, it may prove more difficult to roll out VPPs. While ERCOT has a transparent market where avoided costs of demand reduction and the value of distributed electricity can be directly understood, other states, like California, have a highly vertical electricity market, where cost allocation reporting is murky.
A Virtual Power Plant (VPP) is both demand response and stored electricity in something like an EV or a home battery. For example, 10,000 homes with internet-connected thermostats can all be coordinated to pause their air conditioner for 30 minutes and lower demand on the grid at the expense of allowing those homes to get a little bit warmer. The issue has been that residential customers don’t see a benefit in vertically integrated utility markets because those utilities have multiple problems with such a program:
Lowering demand, especially at peak, means volume charges go down
Virtual resources are not a high capital investment that fits their model
Customers will want to be paid well for allowing their house to warm up
In those markets, this lever will have to be pulled by regulators who will knowingly be taking money from the pocket of the investor-owned utility. That’s no easy task.
Absent deregulation, rate structure could play a role. Note that the charts I have shown are the rate per kWh on the electric bill, but here in Raleigh, my bill consists of several other kinds of charges.
You could ask yourself, why is “Storm Recovery Cost” billed based on how much electricity I used? What about the basic customer charge for being connected? I’ll also mention that $5.70 per month is pretty low for letting Duke Energy turn off my air conditioner nearly every afternoon in the summer and heat every morning in the winter (this is their VPP program). My lowest usage for the past year has been 720 kWh in March when I didn’t need to use the air conditioner or drive my EV. Could that be a sort of floor for houses the same size as mine then make electricity more expensive after that floor is reached? Does it make sense to move to a higher fixed rate and make volumetric rates less impactful? We have more questions than answers to explore.
One thing is clear: utilities and public utility commissions could get more creative with rate design. The illusion of a variable expense might keep the public at bay but utilities are leaving money on the table and punishing users who don’t use as much electricity. They need to find a rate structure that makes more sense for VPPs and renewable resources while supporting an equitable clean energy transition. That would buy them political points and future-proof their business model. Whole neighborhoods powered by their own solar generation are coming, especially in affluent areas. It will be up to utilities to adapt or fail. Unfortunately, if they fail, it will hurt the most vulnerable communities who don’t have the means to have their own solar and battery running their homes.