Last month, the Energy Information Agency (EIA) released its data on residential electricity prices in the United States for 2013, and the numbers speak volumes about the state of the American electricity system.
In general, what customers pay for power depends on where they are.
Once again, Hawaii took home the unwanted honor of having the most expensive electricity of any state in the U.S. with an average rate of nearly 37 cents per kilowatt-hour.
Hawaii’s prices are primarily due to its unique situation as an island energy ecosystem. Because it is separated from the mainland, Hawaii has traditionally relied much more on fuel oil to generate electricity than its peers on the continent. Burning oil is dirty and inefficient, but is easier and cheaper than shipping in coal. Hawaiian Electric, the state’s dominant utility, is currently working to reduce its reliance on imported oil. The state has ambitious plans to reach 67% renewable energy by 2030 while policymakers are investigating how best to import liquefied natural gas to the islands.
Similar issues with geographic isolation also affect Alaska, as does its low population density, but the same can’t be said for New England states, which round out the top ten. In some states, like those in the Regional Greenhouse Gas Initiative (RGGI), strict emissions regulations can put upward pressure on electricity rates.
But emissions trading doesn’t tell the whole story. From 2009-2011, RGGI emissions trading only increased consumer bills in participating states by 0.7%, according to a report from the Analysis Group, and that number is expected to fall in the long run.
To get a more comprehensive picture of what impacts electricity prices, we need to look at the states with the cheapest prices as well.
All of the ten states with the lowest prices are either in the South or Pacific Northwest, and the reasons for their low rates has to do a lot with their power supplies. While the New England states rely more on natural gas to generate electricity, most of the power in the South comes from coal and nuclear plants, which are still cheaper than most other supplies. Both the South and the Northwest also benefit from more hydroelectric power than other parts of the country, which is cheaper than other sources of electricity.
Electricity prices tend to follow the logic of the region's fuel mix — places with cheaper generation sources tend to have lower prices, EIA data shows.
But fuel mix doesn't tell the whole story of price differentiation, especially in New England. There, natural gas pipeline constraints mean that prices shoot through the roof during periods of high demand, significantly raising costs to customers in the Northeast’s wholesale markets. Take a look at fossil fuel spot prices last year from the EIA:
Natural gas prices for the Northeast spiked during the coldest weather of the year, which in turn raised electricity rates. Utilities in the region are currently working to expand gas pipelines to relieve the bottleneck and build more transmission to deliver energy from wind farms and hydroelectric dams in New England and Canada, but constraints continue to impact customers.
To be sure, there’s more to electricity prices than just fuel mix. Deregulation is another factor, although its impacts are more difficult to plot. In general, the states with the lowest electric prices in the deep South are still operating fully-regulated, vertically-integrated electrical systems, and have not opened up to competition the way that Texas and states in the Northeast have.
But change may be coming quickly to states reliant on coal and nuclear for cheap power. New EPA regulations on ozone, mercury, carbon dioxide and other pollutants will push thousands of coal plants across the nation to retire in the next decade, along with price pressure from cheap natural gas.
At the same time, the nation’s nuclear reactors are aging and under pressure from cheaper generation sources like gas and wind power. Without support, Exelon, the operator of the largest nuclear fleet in the U.S., will need to close its reactors in Illinois and New York because they are unprofitable to run. In Illinois, the utility has proposed an ambitious subsidy package that would keep the plants online. The subsidies are worth it, the company says, because the plants are necessary for regional reliability.
But there may be more to the cost of electricity than meets the eye. Some environmentalists and economists have long argued that electricity rates — especially in the cheapest states — are artificially low because they do not factor in the costs of any of the negative externalities of generating power. Climate change, mercury and dioxin pollution, groundwater contamination from coal ash — none of these factors determine what customers pay each month. While that sort of rate protection is beneficial for consumers’ pocketbooks, it also means society has less incentive to conserve electricity and move toward cleaner sources of power.
The biggest changes in how we value our electricity are likely to come from the EPA’s proposed Clean Power Plan, which sets a carbon emissions reduction target of 30% by 2030 nationwide. As Utility Dive has reported, many policymakers are seeking to implement the plan by putting a price adder on carbon in regional electricity markets. Whatever compliance plan states settle on — whether it be a carbon price or plant-by-plant emissions cuts — the EPA's carbon regulations will likely write the story of American electricity rates for decades to come.