Electricity prices this summer are higher than they were last year and will continue to increase in the next 5 years. The major reason is an over reliance on natural gas fired power plants and long lead times and uncertainty in building coal, nuclear and renewable energy projects.
It is very difficult to find anyone in Washington DC to give you a straight answer about the future prices of electricity. People who know energy policy look to four sources to get an idea of where prices are headed:
- Supply and demand of electricity from the federal and state governments,
- Current prices of electricity from companies who actually produce and buy electricity at the wholesale level,
- Current and future prices of electicity and fuels used to produce it from companies and futures markets, and
- What types of power projects are actually being built and which types are being cancelled.
Supply and Demand
Demand for electricity is continuing to increase. As comsumers, we are purchasing computers and electronics that have relatively high electricity demand. Despite talk of a recession, most federal an state officials agree that demand for electricity will rise in future years.
Supply is still adequate but in certain urban areas, there is little reserve power and insufficient transmission. In some instances, power congestion occurs much like vehicular traffic congestion at certain times of the day. This causes electricity prices to rise.
Who's building what?
In the last couple of years, energy companies have built natural gas-fired power plants to meet demand. these are called combustion turbines. Just picture taking an jet engine and bolting it into the ground and feeding it natural gas. The turbine turns a generator and produces electricity. These plants are easier to build, and require less fuel processing.
There were many planned coal-fired power plants. However, but utilities have cancelled them. This is due to Supreme Court ruling and because of the uncertainty about greenhouse gas legislation which could make the costs to reduce CO2 prohibitive.
Nuclear power plants are an favorite among certain, it doesn't produce carbon and increase green house gases. The last nuclear plant was constructed in the U.S. in two decades.
Controlling Electricity Demand
Studies have shown that many residential and small business electricity consumers will lower their consumption in response to higher prices. Unfortunately, most of us don't have the tools to do so, i.e. smart metering and demand side management programs.
Physical and Futures Markets
Electricity producers tell us that the cost of fuels like natural gas, and coal are higher. This directly affects the cost of producing electricity and what you and I eventially have to pay for it.
Companies that produce and buy electricity use the futures markets to hedge their actual physical purchases and sales of electricity and those of natural gas and coal. This is very legitimate and has nothing to do with speculation because ultimately the electricity, natural gas or coal will be actually sold or bought. Spectulators also play a role and give these markets a lot of liquidity. However, these folks never actually take delivery or sell the electricity, coal or natural gas.
The futures markets are like the stock market. So current and future prices of electricity, coal and natural gas are driven by the factors discussed in this article. For example, coal is a global commodity and its spot and future price is more like oil. Coal-fired power plants generate 50 percent of the electricity in the U.S. Natural gas is not a global commodity yet, but there are signs that it can be as the U.S., Europe, Japan, India and China compete for liquid natural gas (LNG). Literally LNG cargoes that are originally destined for the U.S. are sometimes diverted to Europe because they can fetch higher prices there.
Because of the above factors, the U.S. by default will have to rely more on natural gas to produce electricity in the next five years. Even if the U.S. decided to construct more coal and nuclear power plants, the lead times would be 4-6 years and 6-10 years, respectively would not help us in the near term.
The futures markets tend to verify this. In fact, this summer the price of electricity, natural gas and coal are all higher than they were last year. Future prices of electricity and these fuels are predicted to be much higher for the next 5 years.
Next article- what you can do about higher electricity prices