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Why Your Electricity Bills Increase Despite Low Power Pricing

New York, NY –  Last week Bloomberg published an article Why Your Utility Bill’s Still Rising Even When Power’s So Cheap.  In summary, even though the price of power generation has decreased substantially due to low natural gas prices, overall electricity bills increase because of necessary investments in transmission and distribution infrastructure.  “Great article, simple enough, everyone understands that,” I thought, but then I saw the article shared on LinkedIn and posted to groups. The comments and discussion that followed showed that end-users do not fully understand how electricity rates are determined, which is understandable because a) there are over 3,000 electric utilities in the US alone, b) rates are complex, especially for larger end-users, and c) you’re too busy to fully understand this stuff (which is why EnergyWatch is in business).  It’s not enough to pay attention to just the supply rates (for an in-depth explanation of supply rate components, download our Electricity Markets Explained Report), since delivery rates make up more than 50% of your costs in many territories.  Read on to find out why these costs are increasing and what you can do about it.

  • Rate Components
  • Why Your Electricity Bills Increase
  • What Can You Do About It?

Rate Components

4-13-16 - Generation, Transmission, Distribution

In general, you are billed for the power you actually use (kWh), the power you could use (kW), and the infrastructure to get it to your facility (transmission and distribution).  Think of kWh as the odometer in a car, measuring how far you’ve actually traveled; kW demand is like the speedometer, measuring the fastest you’ve traveled at a particular point in time; the interstate highways you travel along are like transmission wires and the local roads are like distribution networks.  In the Bloomberg article, they explain that “Electricity itself makes up about a third of the average utility bill, down from about half just eight years ago.”  What they’re saying is the actual generation of electricity (the kWh produced, the black portion of the graphic above) has decreased substantially because of cheap natural gas (among other reasons).  But it’s the other pieces of the pie (transmission and distribution, the blue and green portions of the graphic above) that have increased that are causing overall costs to trend higher and higher.

Why Your Electricity Bills Increase

Transmission and distribution comprise a substantial, and growing, portion of your costs.  But why? In short, our electricity (and energy in general) infrastructure is old.  Consider this:

  • According to the US government’s Quadrennial Energy Review, the U.S. electricity grid is “aging, inefficient, congested, and incapable of meeting the future energy needs of the information economy without significant operational changes and substantial public-private capital investment over the next several decades.”
  • The Edison Electric Institute estimates that by 2030 the US electric utility industry will need to make a transmission and distribution infrastructure investment of about $900 billion
  • In 2013, the American Society of Civil Engineers gave the US energy infrastructure a grade of D+, citing T&D facilities that date back to the 1880s, rising congestion at key points in the system, and complex permitting and siting issues that prolong the modernization process and increase costs
  • 84% of transmission lines in New York State were built before 1984 and 40% need to be replaced within 30 years

Continuing the earlier analogy of T&D to highways and roads:  our roads and highways are full of potholes, there’s not enough on ramps to connect new sources of cars, and we need bigger, better, safer, and more secure roads and highways.  Basically, we need significant investment to increase resiliency and reliability (remember back to Hurricane Sandy or any other natural disaster or prolonged heat wave that caused blackouts), connect more and more distributed resources such as wind and solar, and modernize the grid.

To make these investments to achieve these goals, the money has to come from somewhere.  That somewhere is you.  You ultimately pay for the majority of T&D investments through increased utility rates.  The chart below shows the amount of investment by investor-owned utilities (IOU) from 1997-2012.

4-13-16 - IOU transmission investments

Expect this trend to continue as utilities invest in the country’s long neglected electricity infrastructure.  The chart below shows actual and projected transmission investment from both IOUs and private transmission companies:

4-13-16 - EEI transmission investments

But please don’t believe everything you read on the internet.  The utility companies can’t just willy-nilly increase rates whenever they want.  Delivery rates are regulated, and each utility has to file a rate case with their respective state Department of Public Service / Public Service Commission / Board of Public Utilities (DPS / PSC / BPU).  In the rate cases, the utilities ask for more money (i.e. more revenue) to spend on various things, transmission and distribution infrastructure being a major component.  For example, in the latest Con Edison electric rate case for 2017, Con Ed asked for $140MM (out of $482MM total) for new infrastructure investment (e.g. smart meters, distributed generation enablement).  The regulators review the requests, interested parties intervene and question the utility company regarding the money they’re asking for and how they determined the need and dollar amounts, they go back and forth with testimonies and cross-examinations, and ultimately a rate case is negotiated between the parties or settled by the DPS/PSC/BPU.  This is an oversimplification of a complicated, lengthy process (up to 11 months in New York), but the main point is the utility doesn’t just get to say “We’re raising rates again!”

What Can You Do About It?

Unlike supply rates, you can’t simply choose another provider for delivery service.  The cost increases are inevitable, but there are a few ways you can manage these costs.

  1. Reduce your consumption and/or demand – One way to combat rising rates is to reduce your total kWh consumption and kW demand. If rates go up 5%, but you cut consumption/demand more than 5%, then you’re actually spending less.  There are plenty of ways to optimize your facility, including peak load management and peer comparison and energy efficiency project identification, and by doing so you’ll reduce costs, reduce GHG emissions, and can also generate income.
  2. Understand the breakdown of cost components for each facility you own/manage – If you don’t know how much you spend on transmission and distribution, how can you effectively manage and reduce your costs? Utility invoice management is central to energy management, providing the data you need to quantify performance, manage risk, identify opportunities, and optimize your facility.  Rather than simply tracking total supply cost and total delivery cost, EnergyWatch provides granular insight into the breakdown of your delivery and supply components: consumption charges, demand charges, customer charges, taxes, and miscellaneous (late fees, adjustments, deposits, etc.).  With this level of detail, you can really dive into the associated savings from your energy management projects, rather than simply using a misleading average cost per kWh.
  3. Get involved – Finally, to combat rising utility rates, you can get involved in the ratemaking process. Join one of the intervenor groups to provide case studies and testimonials in response to utility rate cases, as well as the associated membership dues to hire legal representation during the rate case.  Typical intervenors include: industrial, commercial and other large-scale users of electricity; public interest groups; representatives of residential, low-income and elderly customers; local municipal officials; and, dedicated advocacy groups.  For example, in New York, the New York Energy Consumers Council (nyecc.com) represents the largest energy consumers in New York State and has successfully intervened on behalf of ratepayers for over 50 years (initially as the Owners’ Committee on Electric Rates and the New York Buyers Forum).   As mentioned earlier, Con Edison has filed electric (and gas) rate cases for 2017, so the NYECC has been intimately involved in the proceedings on behalf of its members.  If you’re in the New York market, or own assets in New York, the NYECC will be presenting an overview of Con Ed’s proposed $2.7 billion rate increase at 8:30 am at 570 Lexington Avenue.  No fee for NYECC or REBNY members, $75 fee for non-members.  Please RSVP to donnette@energywatch-inc.com.

4-13-16 - NYECC Rate Case Presentation

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Andy Anderson, LEED AP O+M, CMVP
Managing Director

EnergyWatch Inc.
1261 Broadway, Suite 510
New York, NY 10001
P 212.616.5198
andy@energywatch-inc.com