Utility Power Rates

Utility Power Rates

In light of the current economic situation, which is characterized by a spike in oil prices and an overall energy crisis, the burgeoning renewable energy/cleantech industry has provided the US with a golden opportunity. Renewable energy and energy efficiency technologies not only have the potential to solve many of our long-term energy problems, but they also come with the promise of lowering our energy costs and creating much-needed jobs.

Leading this transformation are solar, wind, and energy efficiency technologies. In 2007 alone, the solar industry attracted $3.2 billion of new equity from venture capital and private-equity firms. This show of confidence has allowed solar providers to make innovative advances in the production of photovoltaic panels and and lowering the price of going solar for both the residential and commercial market.

The decreasing price of solar coupled with ever-rising utility rates makes solar an attractive long-term solution to our energy crisis. In the next three to seven years, analysts project that the costs of solar energy will be lower than today’s conventional forms of coal and petroleum produced electricity. Equipped with federal and state level rebate and incentive programs, going solar has never been more economical or cost effective. The following is information gathered from data based the state of California but holds true for the rest of the country to a significant degree.

California Utility Electricity Rates

From 1970 to 2004 California energy rates have generally been rising, at times with great volatility. During this period, industrial electricity rates grew at a compound annual growth rate of 6.8% (Energy Information Administration). Increases for investor owned utilities were even higher, with a growth of 7.2% for large businesses. These rate increases were frequently drastic: in three cases rates increased by more than 40% in a single year. Year-to-year since 1970, electric utility rates rarely fell; the greatest annual decrease of roughly 11% occurred during the recovery period after the California Energy Crisis, the most recent example of electricity market volatility. While events of the past are unlikely to be repeated, future disruptive events will undoubtedly create similar, if not greater, volatility. With this in mind, we can use our historical data with a standard statistical modeling method to predict the probability of future electric rate changes.

California As A Baseline

California consumes more electricity than all but twelve of the largest countries in the world and is leading the charge to adopt solar energy in the United States. Looking at the range of factors likely to affect utility electricity rates in the near future, the state’s innovative energy strategy is not surprising it’s an economic imperative. Simply because of its size and continued growth California consumes a lot of power.

Trends & Regulations

These will affect the future price of that power

California legislation has halted construction of coal and nuclear powered electrical plants, leaving natural gas-fired plants as the primary option for new power plant construction. According to the California Energy Commission, natural gas currently powers 41.5% of the state’s electricity needs, up substantially from 36.5% in 2002. California’s coastal location puts the state at the end of the West’s natural gas pipelines. Domestic natural gas is not only expensive, its availability to California is declining as the energy needs of the Southwest and other intermediate transportation points increase.

Carbon legislation will increase electricity costs. California legislation calls for the reduction of carbon emissions to 1990 levels by 2020 and requires the California Air Resources Board to regulate and track carbon emissions statewide. The costs of meeting these carbon reduction requirements, along with expected Federal carbon emission regulations, will make coal and natural gas plants more expensive to run. Despite recent legislation that bans long term contracts for electricity from coal-powered plants, approximately 10% of California’s electricity still comes from coal-powered plants in other states. Natural gas, though the cleanest burning fossil fuel, still emits on average 56% as much carbon as coal. What is the net result of these factors? Power providers will be paying carbon costs in some form, a cost that will ultimately increase power rates.

Higher power plant development costs and longer timelines. In California, power plant development faces significant financial and development hurdles. Materials to build plants, such as steel and concrete, and resources to operate them, such as water, are becoming less available and more expensive. Widespread opposition to development of fossil fuel plants, LNG facilities, and transmission lines means that these projects will certainly cost more and take longer, if they are built at all. Under such development constraints, the ability of energy providers to respond to increased power demands is slowed, again resulting in higher rates.

Liquefied natural gas (LNG) a long way out. Imports of LNG are expected to supplement conventional natural gas sources and help stabilize prices in the long term. However, almost every LNG facility proposed for the West Coast has drawn significant environmental opposition. To date, there are no operating or fully permitted LNG facilities on the U.S. West Coast. Sempra has one facility almost complete in Baja, California. Were LNG from international sources to become available in significant quantities, the expense could increase power rates. Pacific Rim LNG prices typically exceed the cost of U.S. pipeline gas.

Forecasting the potential effect on electric utility rates of any one of these factors would be difficult. Predicting their cumulative impact is impossible. Looking at historical data, however, we can see how economic and regulatory factors have resulted in rate changes in the past. For example, “deregulation” of electricity markets in California led to the 2000-2001 California energy crises and dramatic increases in California electricity rates. In the late 1970s and early 1980s, inflation combined with safety concerns about nuclear power plants led to a period of dramatic rate increases. Though future factors affecting change are not likely to mirror past events, past data do offer a good indicator of how rates react to various market forces.

Electricity prices in California have been rising by more than 6% a year, on average, for the past 30 years. Many industry watchers believe that energy prices will rise even faster over the next several decades. An investment in solar is going to be producing power for the next 25 to 30 years. That means you can avoid seeing electricity prices triple or even quadruple, as they have over the last 25 to 30 years.

In the short run and the long run, investing in a clean system makes economic sense. Become a proactive leader of the future today with Ambassador Energy.