Don’t blame clean energy for rising electric bills

While California and Massachusetts both have aggressive clean-energy mandates, that’s not why their rates jumped so dramatically, the report explained. A 2023 report from the U.S. Department of Energy’s Lawrence Berkeley National Laboratory found that the cost of complying with clean energy standards in the 29 states that have enacted them equates to about 3.5 percent of average retail electricity bills. 

So, what is driving electricity rates to rise in these states? Climate change — and reliance on the price-volatile, planet-warming fossil fuels that contribute to it.

“When we looked at the data, we found the biggest drivers of recent rate increases are things like the cost of fossil fuels and the price volatility associated with fossil fuels, and the cost of climate impacts — like wildfires in California in particular,” Pierpoint said.

The cost of relying on fossil gas 

In the short term, turbulent fossil gas prices have been a ​“major driver of higher electricity costs in some states,” the report noted. That relationship was made clear in 2021 and 2022, when Russia’s invasion of Ukraine sent gas prices soaring — and drove up electricity costs as a result.

These price spikes are passed through to utility customers in various ways, and can make up a significant portion of residential utility rates, Pierpoint noted. In states such as Massachusetts, where 64 percent of the state’s electricity was supplied by fossil gas plants in 2023, households face even greater exposure to these costs.

Gas has mostly been a cheap fuel in the U.S. over the past decade, as the fracking revolution has flooded the market. But it’s still prone to market shocks, like Russia’s invasion of Ukraine or winter storms that trigger freeze-offs and supply shortfalls. Events such as these can cause gas prices to go through the roof— and their effects often linger well after the crisis has passed, Pierpoint noted. In Texas and Oklahoma, for example, households face decades of bill increases to cover utility losses resulting from the weeklong disruption of the gas supply system during Winter Storm Uri in February 2021.

More spending on the power grid — but is it the right kind of spending? 

Other drivers of rate increases have been building over a longer time — including the costs of maintaining the utility infrastructure needed to generate power and deliver it to customers.

Take utilities’ increased spending on transmission and distribution grids. Over the past decade or so, the cost of generating electricity for investor-owned utilities has remained largely flat outside of moments of fuel price volatility. But the price of electricity delivery has risen nearly twice as fast as the rate of inflation, driven by the need to repair aging power grids, expand the system to serve rising electricity demand, and harden infrastructure against extreme weather and wildfires.

These grid investments have been increasing across the country, including in states with low rates of clean energy deployment, undermining claims that wind and solar power are the main cause of grid costs, Pierpoint noted. In fact, a focus on smaller, less cost-effective local upgrades rather than long-range power lines has stymied capacity for new renewable energy development, he said.

One particular task — hardening power grids to forestall their risk of sparking wildfires — has played a key role in pushing California utility rates skyward, the report noted. In the wake of deadly fires in 2017 and 2018 that were started by failed power lines, California utilities have been ordered to invest tens of billions of dollars in clearing trees and vegetation, retrofitting and replacing at-risk power lines, and installing equipment to detect fire risks and prevent grid failures.

Those activities now account for a whopping 16 percent of the total cost to customers of the three major investor-owned utilities in California, which has the highest electricity rates in the continental U.S. It’s not the only state struggling with the issue, however. ​“Climate change has made wildfires more common and more severe across much of Western U.S., and Colorado, Hawaii, Oregon, and Texas have all seen major wildfire events linked to grid infrastructure in recent years,” the report stated.

Keeping aging and costly coal plants alive 

The problem of aging utility infrastructure isn’t confined to power grids. In some parts of the country, utility rates are climbing because customers are forced to bear the costs of paying off unprofitable coal-fired power plants.

Utilities across much of the Southeast, West, and Midwest operate in states with vertically integrated energy markets that allow them to pass the costs of building and operating these aging coal plants on to customers — even if the power they produce is more expensive than other alternatives.

That burdens customers in two ways, Pierpoint explained. First, many utilities continue to use their coal plants even when cheaper power is available. That tactic has added about $17 billion to utility customers’ bills since 2015, according to analysis from decarbonization think tank RMI. Second, many utilities have continued to invest in aging coal plants despite their declining economics, with the amount of investment actually rising from 2010 to 2020, per RMI data.

“Utilities are pouring more and more capital into these plants to extend their lives, in some cases to address pollution issues when they should be considering retiring these plants,” Pierpoint said. ​“This goes back to utilities incentives — they have an incentive to increase capital spending, because they earn a guaranteed rate of return.”

That brings up the final point in Energy Innovation’s report — the ​“cost-of-service” regulatory model under which most U.S. utilities operate. This business model rewards utilities with a set rate of return — i.e. revenue — for every dollar they invest in capital assets like power plants and power grids. By contrast, operational costs — including the money they spend on making those power plants and grids operate more efficiently, or on energy efficiency incentives for their customers — earn them no additional margin of return.

This is one big reason why many U.S. utilities are responding to forecasts of major electricity demand growth by proposing to build new fossil gas-fired power plants rather than pursuing less costly and polluting alternatives, such as renewable energy paired with batteries or helping their customers use less energy when electricity demand reaches its peak. That may be good for utility profits — but it’s not a recipe for reducing rising electricity rates.