U.S. electricity price increases on gas price volatility, wildfires

Natural gas price volatility, wildfire damages, and grid hardening investments are driving up electricity rates across the U.S., according to a new report.

One factor that is not contributing to higher electricity prices is rapid growth of renewable energy, which actually serves to keep price inflation in check, according to the report, published by Energy Innovation, a non-partisan think-tank based in San Francisco.

Since 2010, average U.S. residential electricity prices have climbed by almost 40 percent, an increase that mirrors broader inflation. In the 2010s, electricity price increases lagged below general inflation, but prices then surged from 2022 onward. But states with more solar, wind, and energy storage have seen savings, helping to blunt cost increases.

“The states that have added the largest amount of new clean generation are actually states like Iowa, New Mexico, or Kansas that have largely offset some of those other inflationary pressures and kept rates rising at a rate below inflation,” Brendan Pierpont, director of electricity modelling at Energy Innovation and author of the report, told Gas Outlook.

For example, in Texas, a rapid buildout of solar and wind saved the state’s electric grid roughly $31.5 billion between 2010 and 2022, including $11 billion in 2022 alone. Those savings will surely be even higher going forward, with an enormous construction boom of solar and battery storage now underway in Texas. 

The report cited another state that has seen a massive increase in wind power — Iowa. The Midwestern farm state saw the share of electricity coming from wind surge from 15 percent in 2010 to almost 60 percent in 2023. That kept electricity prices rising at a slower pace than 42 other states.

Another example can be found in Oklahoma, where a utility told regulators that its 1,400-megawatt wind farm would save customers $156 million over the course of 15 months because it would avoid the need to purchase gas.

Instead of renewable energy and climate policy, the main causes of electricity price inflation lie elsewhere.

One of the main drivers of higher electricity prices is price volatility for natural gas. The Russian invasion of Ukraine in 2022 sent natural gas prices shooting upwards in markets around the world, including in the U.S., which, despite being the largest producer of gas in the world, saw wholesale prices increase fourfold in a very short period of time. For instance, Henry Hub prices traded between $2 and $3 per MMBtu in the years before the war in Ukraine, but then spiked above $8/MMBtu by mid-2022.

That filtered through to customers as utilities owning gas-fired power plants hiked their rates. Natural gas prices have since fallen back down, but those higher costs for utilities, which are passed on to customers, are recovered over many years. As a result, electricity rates for customers remain stuck at elevated levels.

Gas dependency can be costly. Some of the regions that saw the largest increases in electricity rates tend to have higher shares of their electricity mix coming from gas, including Massachusetts, Connecticut, Florida, Pennsylvania, and Ohio.

Another factor leading to higher electricity prices is the larger levels of investment in building out transmission and distribution lines, including maintenance of older infrastructure. Many transmission lines are 50 years old and need to be replaced. Utility investment in transmission and distribution infrastructure jumped by 64 percent between 2016 and 2023, according to data from the Edison Electric Institute (EEI), an influential utility trade association.

Other experts pointed to the growing role of U.S. gas exports in the form of LNG as an important development in recent years, which exposed the American consumer to global price fluctuations.

“We’ve tied the United States’ gas market to the world because of how much we export, and so when events like Russia’s invasion into Ukraine and other global occurrences cause ripples in the market, customers here pay the consequences of that,” Matt Kasper, deputy director of the Energy and Policy Institute, a utility watchdog group, told Gas Outlook. “We’re going to experience a lot of volatility in the future. This is just going to be the new normal because of how much gas exports we’re building.”

Wildfire

California has succeeded in hitting 100 percent renewable energy for long stretches of time so far this year. But it is also seeing electricity rates skyrocket, leading some to conflate the energy transition with high electricity costs.

But the Energy Innovation report found something of the opposite – rather than renewable energy, it is climate change itself that is leading to higher electricity bills.

“When you look at California specifically, it is absolutely clear that wildfire related costs are the biggest issue,” Pierpont said.

Massive wildfires have ravaged much of the American West, with California hit especially hard. Energy Innovation pegged average annual wildfire damages at more than $10 billion in recent years. A single wildfire in California in 2018 resulted in more than $16 billion in damages, and the utility responsible for the transmission line that started the fire, PG&E, declared bankruptcy in the wake of the crisis. 

Pierpont said that disaster was a “paradigm shift,” which resulted in years of subsequent increases in electricity costs. Utilities stepped up spending on wildfire prevention and management, including burying some power lines. But that has led to higher costs – around $5.5 billion per year in California alone. Those costs now take up the equivalent of 16 percent of California’s main investor-owned utilities’ revenues, and they are equivalent to 7 percent of the total increase in electricity costs for the entire country between 2018 to 2022.

At the time of this writing, in early August 2024, another catastrophic wildfire, one of the largest in California’s history, is burning adjacent to that horrific 2018 fire.

“It absolutely seems to be the case that climate related risks are driving new costs into the electricity sector and those costs are certainly a part of why rates have been rising,” Pierpont said.

Other states see similar dynamics playing out. Oregon has also seen catastrophic wildfires in recent years, and wildfire is a key driver of higher electricity rates.

Oregon’s largest electric utility, PGE, raised rates by 18 percent in 2024.

“Nearly a quarter of that 18% increase was from rising natural gas costs. By contrast, PGE’s latest renewable resource, the Clearwater Wind Facility in Montana, costs less than market energy and lowers rates,” Bob Jenks, executive director of Oregon Citizens’ Utility Board (CUB), a group that advocates for utility consumers, told Gas Outlook in an email. “Fossil fuels, transmission to meet rising industrial demand, replacing aging infrastructure, wildfire costs, and higher capacity needs for extreme temperatures are raising Oregon’s power bills. Those costs, combined with utilities’ incentive to spend big to earn more profits, are to blame for increasing rates.”

The utility industry acknowledges that climate disasters and gas price volatility are contributing to higher electricity costs, but emphasises that there are multiple causes. 

“There are many factors that impact electricity rates and many variables that go into rate design, including many that result in straight pass-through costs to customers. Fuel costs and interest rates are a factor, as are things like local property taxes. When such costs increase, they put upward pressure on rates. At the same time, if these costs go down, customer rates do too,” Sarah Durdaller, a spokesperson for the Edison Electric Institute, a national trade association for utilities, said in an email.

“Today, supply chain constraints continue to have an impact on customer costs. Given the increase in extreme weather events, some state policies also now require electric companies to make additional investments in grid resilience and reliability,” Durdaller added. “At the end of the day, it’s normal to see fluctuations over time.”

But Kasper from EPI said that experts have long warned that climate change would be costly. “We need to completely change our system. We need to be preparing for this,” he said. “And it’s here.” He warned that utilities that continue to build gas-fired power plants and new gas pipelines will only put the country in a deeper hole.

“In addition to having to now pay for our grid to prepare for climate change, we’re also paying for more fossil fuel infrastructure. That’s just going to worsen this crisis.”