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October 25, 2014

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Why American electricity prices might be going up for good

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Leila Navidi

Reid Gardner Station, a coal fired power plant in Moapa, is shown on Friday, Dec. 7, 2007.

As temperatures plunged to 16 below zero in Chicago in early January and set record lows across the eastern U.S., electrical system managers implored the public to turn off stoves, dryers and even lights or risk blackouts.

A fifth of all power-generating capacity in a grid serving 60 million people went suddenly offline, as coal piles froze, sensitive electrical equipment went haywire and utility operators had trouble finding enough natural gas to keep power plants running. The wholesale price of electricity skyrocketed to nearly $2 per kilowatt hour, more than 40 times the normal rate. The price hikes cascaded quickly down to consumers. Robert Thompson, who lives in the suburbs of Allentown, Pa., got a $1,250 bill for January.

"I thought, how am I going to pay this?" he recalled. "This was going to put us in the poorhouse."

The bill was reduced to about $750 after Thompson complained, but Susan Martucci, a part-time administrative assistant in Allentown, got no relief on her $654 charge. "It was ridiculous," she said.

The electrical system's duress was a direct result of the polar vortex, the cold air mass that settled over the nation. But it exposed a more fundamental problem. There is a growing fragility in the U.S. electricity system, experts warn, the result of the shutdown of coal-fired plants, reductions in nuclear power, a shift to more expensive renewable energy and natural gas pipeline constraints. The result is likely to be future price shocks. And they may not be temporary.

One recent study predicts the cost of electricity in California alone could jump 47 percent over the next 16 years, in part because of the state's shift toward more expensive renewable energy.

"We are now in an era of rising electricity prices," said Philip Moeller, a member of the Federal Energy Regulatory Commission, who said the steady reduction in generating capacity across the nation means that prices are headed up. "If you take enough supply out of the system, the price is going to increase."

In fact, the price of electricity has already been rising over the last decade, jumping by double digits in many states, even after accounting for inflation. In California, residential electricity prices shot up 30 percent between 2006 and 2012, adjusted for inflation, according to Energy Department figures. Experts in the state's energy markets project the price could jump an additional 47 percent over the next 15 years.

The problems confronting the electricity system are the result of a wide range of forces: new federal regulations on toxic emissions, rules on greenhouse gases, state mandates for renewable power, technical problems at nuclear power plants and unpredictable price trends for natural gas. Even cheap hydro power is declining in some areas, particularly California, owing to the long-lasting drought.

"Everywhere you turn, there are proposals and regulations to make prices go higher," said Daniel Kish, senior vice president at the Institute for Energy Research. "The trend line is up, up, up. We are going into uncharted territory."

New emissions rules on mercury, acid gases and other toxics by the Environmental Protection Agency are expected to result in significant losses of the nation's coal-generated power, historically the largest and cheapest source of electricity. Already, two dozen coal generating units across the country are scheduled for decommissioning. When the regulations go into effect next year, 60 gigawatts of capacity — equivalent to the output of 60 nuclear reactors — will be taken out of the system, according to Energy Department estimates.

Moeller, the federal energy commissioner, warns that these rapid changes are eroding the system's ability to handle unexpected upsets, such as the polar vortex, and could result in brownouts or even blackouts in some regions as early as next year. He doesn't argue against the changes, but believes they are being phased in too quickly.

The federal government appears to have underestimated the impact as well. An Environmental Protection Agency analysis in 2011 had asserted that new regulations would cause few coal plant retirements. The forecast on coal plants turned out wrong almost immediately, as utilities decided it wasn't economical to upgrade their plants and scheduled them for decommissioning.

The lost coal-generating capacity is being replaced largely with cleaner natural gas, but the result is that electricity prices are linked to a fuel that has been far more volatile in price than coal. The price of natural gas now stands at about $4.50 per million BTUs, more expensive than coal. Plans to export massive amounts of liquefied natural gas, the rapid construction of gas-fired power plants and the growing trend to convert the U.S. heavy truck fleet to natural gas could exert even more upward pressure on prices. Malcolm Johnson, a former Shell Oil gas executive who now teaches the Oxford Princeton Program, a private energy training company, said prices could move toward European price levels of $10.

"When those natural gas prices start going up again, we will feel it in the way of higher electricity prices," warns James Sweeney, a Stanford University energy expert.

The loss of coal is being exacerbated by problems at the nation's nuclear plants. Five reactors have been taken out of operation in the last few years, mainly due to technical problems. Additional shutdowns are under consideration.

At the same time, 30 states have mandates for renewable energy that will require the use of more expensive wind and solar energy. Since those sources depend on the weather, they require backup generation _ a hidden factor that can add significantly to the overall cost to consumers.

Nowhere are the forces more in play than in California, which has the nation's most aggressive mandate for renewable power. Major utilities must obtain 33 percent of their power from renewable sources by 2020, not counting low-cost hydropower from giant dams in the Sierra Nevada mountains.

In some cases, the renewable power costs as much as twice the price of electricity from new gas-fired power plants. Newer facilities are more competitive and improved technology should hold down future electricity prices, said former FERC Chairman Jon Wellinghoff, now a San Francisco attorney.

But San Francisco-based Energy Environmental Economics, a respected consultant, has projected that the cost of California's electricity is likely to increase 47 percent over the next 16 years, adjusted for inflation, in part because of the renewable power mandate and heavy investments in transmission lines.

The mandate is just one market force. California has all but phased out coal-generated electricity. The state lost the output of San Onofre's two nuclear reactors and is facing the shutdown of 19 gas-fired power plants along the coast because of new state-imposed ocean water rules by 2020.

"Our rates are increasing because of all of these changes that are occurring and will continue to occur as far out as we can see," said Phil Leiber, chief financial officer of the Los Angeles Department of Water and Power. "Renewable power has merit, but unfortunately it is more costly and is one of the drivers of our rates."

"While renewables are coming down in cost, they are still more expensive," said Russell Garwacki, manager of pricing design and research at Southern California Edison. The company is imposing a 10 percent price hike this year to catch up with increased costs in the past.

Officials at the California Public Utilities Commission, responsible for setting utility rates, dispute predictions of large-scale electricity price hikes in the near future. Edward Randolph, head of the PUC's energy division, said price increases were not likely to exceed the rate of inflation, though the commission has refused to spell out the data on which it bases its projections. In any case, while California already has some of the highest hourly rates for electricity in the nation, the average consumer in the state pays bills that are below the national average because overall electricity use is so low.

The push to wean California off fossil fuels for electricity could cause a consumer backlash as the price for doing so becomes increasingly apparent, warns Alex Leupp, an executive with the Northern California Power Agency, a nonprofit that generates low-cost power for 15 agencies across the state. The nonprofit was formed decades ago during a rebellion against the PUC and the high prices that resulted from its regulations.

"If power gets too expensive, there will be a revolt," Leupp said. "If the state pushes too fast on renewables before the technology is viable, it could set back the environmental goals we all believe in at the end of the day."

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