The rising cost of electricity in the U.S. has become a significant concern, with Americans now facing electricity bills 42 percent higher than a decade ago. This trend is accelerating, prompting a closer look at the factors influencing these rising costs.
Recent data from the Bureau of Labor Statistics (BLS) indicates that electricity prices reached an all-time high for the month of October, marking the 11th consecutive month where the average price either hit or matched a record for that specific month. In fact, each of the past ten months heralded record-setting prices.
Currently, the average cost of electricity stands at 13.2 cents per kilowatt-hour (KWH), up from 12.8 cents just a year ago. To put this in perspective, during October 2003, consumers paid merely 9.3 cents per KWH. Detailed average price data for electricity and other items can be accessed on the BLS Consumer Price Index site.
Interestingly, while electricity prices are climbing, most other prices are either stable or declining. To illustrate, the October Consumer Price Index (CPI) revealed a drop of 0.1 percent for all items in the past month, and overall prices only increased by 1.0 percent over the last year. In contrast, electricity costs rose by 3 percent within the same timeframe, outpacing even medical care services.
A Brief Review of Electricity Generation by Fuel Type and Cost
So, what is driving the increase in electricity prices? Unfortunately, the reasons aren’t entirely clear.
Electricity costs are primarily influenced by three factors: generation, transmission, and distribution. Generation refers to the actual cost of creating power, while transmission and distribution encompass the expenses related to building and maintaining the necessary infrastructure.
Since costs related to transmission and distribution can differ by region, we’ll focus solely on generation expenses. According to the U.S. Energy Information Administration’s (EIA) Levelized Cost of New Generation Resources in the Annual Energy Outlook 2013, here are the average levelized fuel costs per kilowatt hour for new power plants in 2018:
– Conventional Coal: $0.100
– Conventional Natural Gas: $0.067
– Advanced Nuclear: $0.108
– Hydro: $0.0903
– Biomass: $0.111
– Geothermal: $0.089
– Wind: $0.086
– Solar PV: $0.144
Clearly, natural gas emerges as the most cost-effective option.
To further understand the landscape, consider the fuel breakdown for U.S. electricity generation in 2012, according to the EIA:
– Coal: 37 percent
– Natural Gas: 30 percent
– Nuclear: 19 percent
– Hydro: 7 percent
– Biomass: 1.42 percent
– Geothermal: 0.41 percent
– Wind: 3.46 percent
– Solar: 0.11 percent
What can we conclude from this information?
Looking ahead, we anticipate an increased reliance on natural gas for electricity generation in the U.S. for four primary reasons:
(1) New EPA emissions regulations for coal-fired power plants set to go into effect in 2015; (2) Innovations in hydraulic fracturing that have unlocked a wealth of inexpensive natural gas that burns more cleanly than coal; (3) A general aversion to nuclear energy in the wake of the Fukushima disaster; and (4) Current renewable energy sources are insufficient to meet electricity demand.
The last two reasons require little elaboration, allowing us to focus on the first two key factors.
What You Need to Know about What’s Going on with Natural Gas
Regarding coal, the newly established carbon emissions regulations effectively phase out coal as a viable fuel source for domestic electricity generation. The new EPA mandate, effective in 2015, stipulates that coal-powered plants must limit emissions to no more than 1,100 pounds of carbon dioxide per megawatt-hour. Currently, the average for U.S. coal plants stands at approximately 1,700 pounds per megawatt-hour.
In light of these new requirements, approximately $1 billion would be necessary to retrofit existing coal plants with new carbon reduction technology. Overall, it’s estimated that compliance with the new EPA rules will cost the coal industry nearly $100 billion. Rather than incur the costs of retrofitting, many power plants are likely to switch from coal to natural gas.
This transition reflects a trend that has been ongoing for over a decade. In fact, coal’s contribution to U.S. energy generation has declined from over 50 percent a decade ago to about 37 percent now, while natural gas’s share has risen from 18 percent to 30 percent.
Natural gas is not only cleaner but has become more accessible thanks to recent advancements in hydraulic fracking that have revealed significant reserves. The EIA forecasts that by 2035, shale gas production will soar to 13.6 trillion cubic feet, constituting nearly half of all U.S. natural gas output.
Alongside the domestic shift from coal to natural gas for electricity generation, the surge in available natural gas has opened avenues for export. Recently, the Department of Energy has granted several natural gas export permits and has numerous applications pending review. The transition to natural gas exports presents intriguing investment opportunities.
While we cannot predict the exact impact on U.S. electricity prices, we can anticipate significant changes as the industry shifts from coal to gas and expands its export capabilities. Exploring profitable investment avenues during this transition is of utmost importance.
The most straightforward and lucrative opportunities may have already been realized through shale exploration. However, many promising prospects for substantial profits remain, and we are currently researching these for you.
In the meantime, our friend Marin Katusa is closely monitoring the situation. Click here to check out his latest insights.
Sincerely,
MN Gordon
for Economic Prism
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