Blog

Why is electricity so expensive? Utility electricity costs are going up! What you can do about it!

Updated: May 12


Utility rates are going up? How solar can help you take back control of electricity costs.
Why is electricity so expensive?

IN SUMMARY

  • Utility rates have risen by 15% nationally over the past ten years. In many states, such as California and Hawaii, the increase has been more significant.

  • Rates are projected to increase due to outdated infrastructure, increasing employee costs, natural disasters, and more.

  • Solar panels and residential batteries provide homeowners with the best solution to reduce electricity costs and avoid power outages.

Introduction:


Over the past decade, electricity rates have risen nationally by 15%. Electricity, unlike other expenses, is one that homeowners have little flexibility to control. This number can be shocking when you think about how large a percentage of a household income electricity costs makeup, 2.7% of a household's income in California and 4.7% in Hawaii, the highest percentage in the nation.

Many homeowners may wonder why electricity rates are already so high and why are they going up? Many factors come into play for why electricity companies keep raising electricity rates, so let's examine the factors that lead to you paying 15% (or more in many markets) more for electricity in 2021 than you did in 2011!

Why do utility rates keep increasing every year?
Seven Reasons why utility electricity rates keep going up

Most Electrical Utilities Are Privately Owned:

Privately owned utilities care about investors instead of ratepayers
Most Electrical Utilities Are Privately Owned

When customers receive their utility bill every month, most see a name on the bill connected to the geographic place they live. San Diego Gas and Electic, Southern California Edison, and Hawaii Gas and Electric are just a few electric utilities with a state or region on their names. As a result, some people assume that the utility is affiliated with the state or region where they live. This is very rarely the case. Most electrical utilities are privately owned and, as a result, are driven by the interest of investors instead of the ratepayers.


Companies like Sempra Energy, the Fortune 500 owner of San Diego Gas & Electric, and Southern California Edison have long received criticism for how it focuses on its well-being instead of the citizens of California. In December of 2020, a watchdog organization claimed that one of the energy companies owned by Sempra Energy used customer money to fight climate change out of fear that a shift to renewable energy would hurt its business.

Privately owned utilities have to go back to their shareholders and show growth and increases in revenue. Time and again, they have shown that their preferred way to do this is simply by increasing the rates and passing along costs to their customers.

Most utilities have monopoly powers:

How utilities use monopoly powers to drive up electricity rates
Most utilities have monopoly powers

Because of the cost of setting up the infrastructure to provide power to consumers, most utilities are effectively provided with monopoly powers. What was meant to help provide electricity to as many people as possible has created a system where utilities exert political pressure to help them maximize profits.

As David David Pomerantz, Executive Director of the Energy and Policy Institute, put it on the Building Local Power podcast, "In most states the monopoly electric utilities are some of the most powerful political players in that state. They control many of the levers of government almost like puppeteers, and that makes it really hard for them to be effectively regulated in the public interest."


Utility pensions, payoffs, and paychecks:

How utilities increase utility rates to cover pensions, payoffs, and paychecks
Utility pensions, payoffs, and paycheck

Customers are not just paying for the electricity that a utility company produces. Utility customers are also paying for all the other costs associated with running the utility. As a result, when the President of Sempra Energy quits after ten months on the job and gets a $6.9 million severance package, it is the customers of SDG&E who cover this expense.


It's not just executives who get significant payouts. It is also the pension programs for employees. In 2016 LADWP paid out $435 million in pension benefits, which was projected to increase. Employees deserve their pensions, but unfortunately, consumers end up seeing increased kilowatt costs year after year to cover the expense because of poorly structured pension plans.

Crumbling electrical infrastructure:

50% of the US electrical grid was built before 1970 leading consumers to pay more for electricity
Crumbling electrical infrastructure drives up the price of electricity

When homeowners think about why the costs keeping increasing year over year, many assume it is because of a lack of electrical production. In reality, electrical production has increased in the past decade as more renewable energy has come online. The truth of the matter is that over 50% of the electrical infrastructure was built before 1970, and another 20% was built in the 1970s or 80s!

As the utility grid has aged, it has lead to massive costs that utility companies pass along to customers. As utilities invest in the new electrical infrastructure, they pass the costs along to customers. Hawaiin Electric Company (HECO) recently announced a plan to convert a coal power plant into an oil-burning plant. The Kapolei Energy Storage project proposed by HECO is projected to significantly increase the costs that ratepayers on Oahu pay for electricity in 2022.

As the utility grid continues to age, these projects and costs are only going to increase. While it is impossible to project the exact financial impact the projects will have on homeowners, it is safe to assume that these projects will keep coming up and, with them, significant increases in electricity costs.


Fossil fuel and coal makes up 60% of America's electricity generation:

Fossil fuels and coal are increasing in cost, how that drives up the cost of electrify in America
60% of electricity in America comes from fossil fuel and coal

Even as the US has increased the diversification of how we produce electricity in this country, the most significant percentage of electricity production in the US, 60%, comes from fossil fuel or coal, according to the US Energy Information Administration.


As the demand for fossil fuels and coal has increased around the world, their availability has decreased. This scarcity is projected only to continue, driving up their costs and, as a result, the cost of producing electricity from these resources. With such a large percentage of the nation relying on electricity from these resources, this fact will drive up electricity rates across the nation as electrical utilities transition to other electricity sources.


Natural disasters are having dramatic impacts on utility rates:

PG&E filed for bankruptcy protection of $25.5 billion as a result of debts related to forest fire
Natural disasters impact the cost of electricity for homeowners

UC Berkeley's Haas Business School and NEXT 10 completed a recent study that found that customers in California Pacific Gas and Electric (PG&E) paid 80% more per kilowatt-hour than the national average, Southern California Edison (SCE) charged 45% above the national average, and ratepayers in San Diego Gas & Electric (SDG&E) were charged double the national average for electricity.


Many factors come into play for why California has such high electricity costs, but one of the most significant impacts is the financial damage that forest fires have had on utilities. PG&E filed for bankruptcy protection in 2019 to restructure debts of $25.5 billion related to its hand in forest firest. These debts have been shown to directly hand in the increased rates California electricity customers have to pay.


It is not just California utilities that natural disasters have impacted. After the recent power outages in Texas caused by the February snowstorm, consumers will be paying higher electricity rates. Some experts project that these increases will continue for decades to come as utilities deal with the financial stress that the storm caused.


More people are going solar:


The increase in solar installation across the nation over the past decade has been significant. The Federal Solar Tax Credit, increased solar financing options, Net Energy Metering programs, and how solar increases home values have driven homeowners to switch from utility power to solar power.

This shift of consumers from utility power to solar power has decreased the consumer base for utilities and, according to utilities, increased operating costs. As a result, many utilities are now charging consumers who have not made the switch to solar more for electricity. PG&E recently said that they are now charging none solar customers $170 more a year for electricity as a result. As more homeowners switch to solar, people without solar can expect to see the costs passed along to them by the utility to only increase in the years to come!

What can customers do about rising utility rates?


As covered above, for most customers, utilities have monopoly control over the supply of electricity, so for most customers, the increasing costs of electricity are simply something that consumers have to pay.


Solar and home solar batteries provide homeowners with the best alternative to utility electricity rates. Solar and energy storage provide a few different solutions when compared with rising utility rates. If a homeowner has the capital available, they can eliminate their electricity entirely and only have a small grid connection fee.

When purchasing solar, the Federal Solar Tax Credit and energy storage rebate like California's Self-Generation Incentive Program (SGIP), the cost of solar and battery back up can pay for itself quickly when compared to utility electricity.

For consumers who do not want to pay anything upfront, a solar lease or PPA can provide a much lower cost for each kilowatt of electricity and predictable electricity costs going forwards. When utilized in a Grid Service Agreement like Hawaii's Kukui Hele Pō program, customers can get Sunrun's Brightbox battery backup technology and additional savings on their electricity bill.

Conclusion:

Historically utility rates have gone up significantly, and based on all trends and data, these rate increases will continue going into the future. As our grid ages and natural disasters increase, the amount that American's pay for electricity is only going to increase, even as power outages and other grid issues become more common.


Solar and energy storage provides homeowners with the best alternative utility savings. When combined with products like the Tesla Powerwall 2 or LG Chem RESU 10H, solar and energy storage can provide a homeowner with significant savings and long-term protection against blackouts.

If you are interested in learning more about how solar and home solar batteries can protect you against rising electricity costs, schedule a free consultation with Alchemy Solar today.

41 views0 comments