Your electricity bill is probably the one household expense you don’t think much about – until it goes up or down. And when it does, it can be frustrating.
Natural Gas
Natural gas is the largest source of electricity generation in the United States (about 38%), followed by coal and nuclear energy. Because of this, Texas electricity prices and other states tend to move in tandem with natural gas prices, and when gas costs go up, so do power prices. That’s been the case this winter, with some areas seeing doubled home heating and electricity prices over last year.
The spike in natural gas costs has been driven by the ongoing conflict between Russia and Ukraine, which has reduced global supply and pushed up prices. According to experts, that’s likely to continue this summer and into the winter as Russia continues to interfere with energy supplies globally.
In addition to natural gas, higher prices have been driven by labor shortages, pushing up utility companies’ wages. This, in turn, has boosted operational costs. Then there are the infrastructure challenges, with large parts of the US electrical grid dating back decades and needing upgrades to accommodate greener energy sources like solar, wind, and electric vehicles.
Global Conflicts
Many states see their energy prices escalate because of global conflicts that impact oil and gas prices. The war in Ukraine, for example, has caused prices to increase across the globe. This impacts the US because of how interconnected energy markets are. Fossil fuels are a limited resource, and the world’s supply is finite. As demand grows, the cost of producing electricity increases.
Prices also vary by customer type. Industrial customers pay less per kilowatt hour than residential or commercial consumers because they can use large amounts of power simultaneously. This helps utilities achieve efficiencies of scale when they need to purchase, transport, and deliver power.
The policy also impacts energy prices. New England states and California are in our dubious over-15-cent club because their pipeline resistance allows them access to the abundant supply of cheap natural gas from nearby Pennsylvania. In contrast, Nebraska is in our lowest electricity price band because of its diverse portfolio of nuclear, coal, and renewables that can offset the increased cost of natural gas.
Widespread power outages are expensive for consumers, businesses, and communities. They cost billions in lost productivity and revenue, spoiled inventory, delayed production, and inconvenience.
Supply Chain Crisis
A global supply chain crisis is straining businesses and driving up consumer prices. The bottlenecks caused by shortages of components and surging costs for critical raw materials are feeding on one another, squeezing manufacturers worldwide. The result is higher costs for companies that produce and sell solar panels, batteries, and inverters. This is, in turn, driving up electricity prices for consumers as those companies pass on these higher costs to them.
The price of energy is also different in every region of the country. The cost of electricity per kilowatt-hour (kWh) in New England is about twice as high as in the Mountain West. Public service commissions set electricity prices and vary by state. They are based partly on the costs of electricity generation but also on transmission and distribution charges and consumer costs.
Utility providers are considered natural monopolies and are heavily regulated to ensure that services are adequate, companies are responsive, and prices are fair. But even this government regulation is insufficient to prevent higher electricity bills for some consumers. A recent report by Bank of America found that a “sizeable share” of households could be forced to cut back on other expenses to keep the lights on. That’s a concern, given that the average household spends about 16% of its budget on utilities.
Inflation
Inflation is the general rise in prices that makes dollars in your wallet lose their buying power over time. Also, inflation affects many things, including the cost of raw materials that go into products, the wages workers pay for their labor, and how much money businesses make from selling their goods and services. Businesses watch for signs of inflation because a high rate can slow economic growth.
Data collectors track price changes for a basket of consumer goods to create an inflation index, which can then be compared from quarter to quarter or year to year to measure inflation rates. The Labor Department’s Consumer Price Index, or CPI, is the most popular consumer inflation tracker. Federal Reserve officials use another gauge for inflation, called the personal consumption expenditures price index, or PCEPI, to guide their monetary policy decisions.
Demand-pull inflation can cause prices to surge when there’s too much money chasing too few goods and services. Supply shocks or other factors that reduce production, such as natural disasters or rising oil prices, can lead to cost-push inflation.
A small amount of inflation is typically considered a sign of a healthy economy. The Federal Reserve, which sets US monetary policy, targets an annual inflation rate of about 2%. However, too rapid inflation can erode purchasing power, stifle demand, and threaten businesses’ profitability.
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