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“The Key Drivers Of Increasing Electricity Cost”

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Ron Miller's picture
Principal Reliant Energy Solutions LLC

Ron Miller is an energy industry expert creating value by analyzing assets, markets, and power usage to identify, monetize, and implement profitable energy and emission reduction projects. He is...

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As the world moves through an energy transition from fossil fuels to renewables, there are some inconvenient truths that are starting to appear. Other than the huge amounts of renewable energy minerals that will be required for this transition, and supply reliability and price volatility of these minerals, one key issue is the rising cost of delivered electricity to the end user.

The cost of electricity has two components: 1) production cost from the use of coal, nuclear, natural gas, HFO, diesel, solar, wind, hydro, or geothermal, and 2) the delivery (transmission, distribution) costs from generation source to the end user.

The Energy Information Administration (EIA) has analyzed the breakdown of production and distribution costs for electricity in the U.S from 2010-2020 as shown in Graph 1.

Reviewing this graph, one clear message evolves: production costs are declining while delivery costs are growing. After adjusting for inflation, major utilities spent 2.6 cents per kilowatt-hour (kWh) on electricity delivery in 2010, using 2020 dollars. In comparison, spending on delivery was 65% higher in 2020 at 4.3 cents/kWh. Conversely, utility spending on power production decreased from 6.8 cents/kWh in 2010 (using 2020 dollars) to 4.6 cents/kWh in 2020, or a 32% decrease.

Graph 1 – Major U.S. utilities annual spending by category 2010-2020

Source: U.S. Energy Information Administration, based on data from Federal Energy Regulatory Commission (FERC) Financial Reports

In real 2020 dollar terms, spending on electricity delivery increased every year as utilities worked to replace aging equipment, build transmission infrastructure to accommodate new wind and solar generation, and install new technologies such as smart meters to increase the efficiency, reliability, resilience, and security of the U.S. power grid.

In 2021, the U.S. has seen increased demand for consumer goods and the energy needed to produce them, translating to higher energy prices to fuel electric generators, especially for natural gas.

Using EIA data, the increase in natural gas prices from 1 Jan 2021 to the peak on 5 Oct 2021 was 135%, while the increase from 1 Jan 2021to 10 Dec 2021 was 45%, as shown in Graph 2. U.S. consumers of all varieties are seeing a dramatic increase in electricity production costs (and electric bills) this fall and winter due to higher natural gas market prices.

Graph 2 – Natural gas prices in U.S. for 2021

Electricity prices in Germany increased from 19.5 Euros per kWh in 2006 to 29.4 Euros per kWh in 2018, a 3.5% annual energy price increase as shown in Graph 3, as that country incented solar energy with high feed-in tariffs while experiencing higher renewable energy penetration.

Graph 3 – German electricity prices 2006-2018

Electricity prices in California rose 5 times more than in the rest of the U.S. over 2011-2017 as increased renewable energy penetration caused price inflation as shown in Graph 4. The average electricity price increase for California during this period was 3.60%, while the average price increase for the remaining 49 states was 0.67%.

Graph 4 – Electricity prices in California 2011-2017

Summary:

  1. Increasing renewable energy (RE) penetration is driving increased delivery electricity prices
  2. Delivery costs are increasing at a rate above the cost of generating electricity, thus producing an increase in price to the consumer
  3. As the RE penetration increases, additional capital expenditures will be made to increase transmission/distribution assets, along with energy storage facilities to bridge the gap between intermittent solar/variable wind energy production and consumer demand
  4. Increasing transmission/distribution costs will be passed onto consumers, (residential, commercial, and industrial), and those higher future electricity prices will be increasingly painful to be absorbed by the poorer segments of all countries.

Copyright © December 2021 Ronald L. Miller All Rights Reserved

 

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Matt Chester's picture
Matt Chester on Dec 14, 2021

How much (if at all) is this type of information being shared with customers? 

Ron Miller's picture
Ron Miller on Dec 15, 2021

Matt, I suspect very little. A good watchdog source for this information is Paul Alvarez from Wired Group.

Bob Meinetz's picture
Bob Meinetz on Dec 16, 2021

Matt, the information is being shared every month on our electricity bills. And Ron's chart only shows data through 2017, and price increases are accelerating. From 2011 (not coincidentally, the year before San Onofre Nuclear Generating Station was shut down) through 2020, California electricity prices have risen over seven times faster than the national average:

Yet renewables advocates continue to lie - to claim costs of solar and wind are "coming down", or are even "cheapest", by simply excluding the cost of delivery to customers. As Ron clearly demonstrates, replacing nuclear with natural gas, solar, and wind has sent CA electricity prices through the roof - and raised carbon emissions.

Ron Miller's picture
Ron Miller on Dec 18, 2021

Bob, great research to add to my abbreviated history. Can you provide the link for this graph? It is very interesting and I would like to find the actual electricity rates by year in California and the rest of the US for an updated comparison? Thanks, Ron

Ron Miller's picture
Ron Miller on Dec 18, 2021

Bob, you could send info directly to me at ron@reliantenergysolutions.com Thanks, Ron

Bob Meinetz's picture
Bob Meinetz on Dec 21, 2021

Ron, the graph is a product of the U.S. Energy Information Administration's Electricity Data Browser, a wonderful (and impartial) tool for retrieving and graphing data relating to electricity generation and consumption in the U.S.:

https://www.eia.gov/electricity/data/browser/

Though it's not the most intuitive interface, there are basically four input parameters you can provide: 1) Under "Change data set", select what metric it is you're retrieving (in this case, Average retail price of electricity), then 2) Click the FILTER/ORDER button, and in the left column under Geography you can select any combination of states and/or the entire U.S.; in the right column, you can select sector- or generation-specific data, then 4) In the blue bar below it, select the interval of data you want to retrieve - any period between 2000 and 2021, and the data frequency  (Monthly, Quarterly, Annual).

By clicking DOWNLOAD, you can select a variety of image formats (PDF, PNG, SVG), and raw data in two formats (CSV table, CSV data).

Here's a link to the graph above.
 

Ron Miller's picture
Ron Miller on Dec 21, 2021

Thanks, Bob.

Andrew Blakers's picture
Andrew Blakers on Dec 15, 2021

The USA has a small penetration of solar and wind and its premature to draw any conclusions.

Australia is currently at 36% renewables (mostly solar & wind), heading for 50% in 2025. Look downunder for reliable pointers to the future of electricity and energy prices. In Australia, the states with the highest renewable energy fraction have the lowest electricity prices. The more solar & wind, the lower is the electricity price. This is acknowledged by the entire industry and every state and federal government - facts on the ground based on extensive experience.

Solar & wind are much cheaper than coal & gas electricity in Australia . The compelling economics of solar & wind means that 99% of new generation capacity is solar & wind.

Ron Miller's picture
Ron Miller on Dec 15, 2021

Andrew, my energy price vs. renewable energy penetration graph was making the point for California’s increase in price. Total California renewable energy reached 33 percent penetration, or 90,208 GWh in 2020, up 2.5 percent from 2019 levels. https://www.energy.ca.gov/data-reports/energy-almanac/california-electricity-data/2020-total-system-electric-generation I have worked on renewable projects in Australia and about 50% of the end user delivered energy cost is transmission.

Andrew Blakers's picture
Andrew Blakers on Dec 18, 2021

Australia is installing solar/wind at about double the per capita speed of California. Prices are falling as the solar/wind penetration rises.

Ron Miller's picture
Ron Miller on Dec 21, 2021

Andrew, are electricity prices falling or are end-user, delivered to the retail customer prices falling?

Bob Meinetz's picture
Bob Meinetz on Dec 23, 2021

"Prices are falling as the solar/wind penetration rises."

Nonsense, Andrew. Throughout Australia, but especially in South Australia, electricity prices are skyrocketing. Though your talking point has been debunked repeatedly, like a phantom it arises from the dead again...and again:

"How to fight the rising cost of electricity rates in Australia

It’s no secret that the cost of electricity in Australia is increasing. Electricity costs are on the rise! In fact, it’s hard to get a straight answer as to what the average cost of residential electricity is.

The average cost of electricity in Australia

The average cost of electricity in Australia has a number of variables, depending on the size of your home and how many appliances you use on a daily basis. However, the national average for electricity consumption in Australia is 9,044 kWh per year or 14 kWh per day.

Unfortunately, in the past three years, household electricity bills have risen by over $550. According to the annual performance report from the Essential Service Commission of South Australia, South Australian consumers also pay up to $168 per year to fund green energy initiatives. This includes the giveaway of home energy saving devices, as well as funding for solar panels to generate electricity for the grid and for the promotion of alternative energy resources.

This report revealed that the average household electricity bill in South Australia has increased from $1165 to as much as $1980 in just three years. Consequently, residential electricity disconnections in South Australia have increased dramatically from 4,748 to 9,311 in 2021 alone. These disconnections are due to financial hardships among South Australians who are unable to pay their expensive monthly power bills.

Fast-forward to today, and things aren’t much better. Australians are still paying too much for their electricity. In a comparison of advertised residential electricity prices, South Australia, Victoria, Queensland, and New South Wales all rated poorly when compared to European countries."

 

Ron Miller's picture
Ron Miller on Dec 28, 2021

#BobMeinetz Bob, great analysis. Can you provide the link to your data?

#AndrewBlakers Andrew, what say you t this information?

 

Thanks, Ron

Andrew Blakers's picture
Andrew Blakers on Dec 28, 2021

Focusing on wholesale prices (where the costs and benefits of solar/wind explicitly appear, separate from network & billing etc charges): averaged over 2021, the five NEM states Tasmania, South Australia, Victoria, NSW and Queensland had renewable fractions and spot prices (AUD/MWh) of 104% & $48; 61% & $64; 34% & $60; 22% & $86; 19% & $111 respectively.

Note the inverse correlation between prices and renewables fraction.

This is far ahead of the USA. Facts on the ground show that more solar/wind = lower wholesale prices in Australia. I think the same will be true for the USA.

Data from OpenNEM, harvested this morning.

A$100 = US$72

There is near universal agreement in Australia (including from the National Energy Market Operator) that the renewable fraction of the Australian grid will be 70-90% by 2030 (nearly all of it solar/wind with hydro representing 7%).

 

 

 

Bob Meinetz's picture
Bob Meinetz on Dec 31, 2021

There are no "spot prices" for renewables when they aren't available, Andrew. Do you only use energy when the sun is shining or wind is blowing? Of course not. Your disingenuous comparison ignores the costs of backup power and in grid reliability - costs unique to dependence on unreliable wind and solar.

Note the correlation between prices and renewables fraction when those costs are factored in. South Australia has some of the most expensive electricity in the world:

Nathan Wilson's picture
Nathan Wilson on Jan 2, 2022

Andrew, you're missing a core message of this article: electricity production cost is not the total cost.  It may surprise you to learn this, but even when the levelized cost of renewable electricity is less than that of coal, the combined cost of a coal+renewables grid (such as that in Australia) is higher than for coal alone (even before the costly needed grid expansion is added to gather the renewable energy).

 

The reason is that variable renewables always need balancing/backup from dispatchable power plants (e.g. hydro, fossil fuel, or hopelessly expensive storage).  Like most places, Australia has some hydro, but not nearly enough to support variable renewables in a zero-fossil fuel grid.  And the predominant fossil fuel in Australia is coal, which has relatively high capital cost and low fuel cost.  The renewable energy replaces some of the cheap coal, but doesn't avoid many of the expensive coal-fired power plants.

Also, unlike the US grids which are regional (or even state-wide in the case of Texas), the Australian grid is national.  While we can discuss the production mix by states, the balancing of consumption occurs nationally.  So even South Australia has electricity which is 55% fired with dirty coal.

 

The result is that Australian electricity, even with all their solar and windpower, is much dirtier than that of the US.  The reason is we balance our moderate renewables penetration with very clean nuclear and relatively clean fossil gas (coal usage is shrinking). 

Ron Miller's picture
Ron Miller on Jan 3, 2022

Nathan Wilson and Bob Meinetz: Excellent commentary and facts for Andrew to consider. Thanks, Ron We have to get the public thinking in terms of apples-to-apples, end-user electricity prices vs. just renewable production costs during sunny, windy days. 

Andrew Blakers's picture
Andrew Blakers on Jan 4, 2022

The 5 eastern Australian states (80% of the population, 15% of the land area) are connected together to form the 'National Electricity Market". Interstate transmission mitigates but is not strong enough to wash away differences in wholesale spot prices. As discussed above, there is an inverse correlation between wholesale spot price and renewable energy fraction.

Facts on the ground: the renewable fraction of the NEM is now 36%, is tracking towards 50% in 2025, and will be 70-90% by 2030 (nearly all of it solar/wind with hydro representing 7%). Wholesale spot prices and electricity emissions are falling as the RE fraction rises.

Solar & wind won the energy race.

Nuclear electricity needs substantial backup because it usually operates dead flat day and night, whereas demand fluctuates. This is no different from renewables. It is not a problem for either because of pumped hydro, batteries, demand management and strong interstate transmission.

Bob Meinetz's picture
Bob Meinetz on Jan 5, 2022

"Nuclear electricity needs substantial backup..."

No, Andrew. In the U.S., backup means "help or support". Nuclear runs all the time because it's available all the time - it's by far the most reliable source of power. Unlike wind and solar, no help or support needed. Electrical grids can't have enough reliable power.

"This is no different from renewables. It is not a problem for either because of pumped hydro, batteries, demand management and strong interstate transmission."

Tell that to the California system operator, after drooping wind generation at its Altamont Pass Wind Farm nearly caused a system-wide blackout (Aug 15, 2020):

"Why more solar can't help solve California's "net peak" problem

CAISO’s peak demand levels over the weekend were lower than its historical highest peaks in 2006 and 2017. But 'the operational challenge that we face now is more around that net peak event,' [CAISO President Steve] Berberich said, which includes accounting for increasing demand from rooftop solar-equipped customers as their own self-supplied solar power dissipates. 'That solar resource is fading fast, and we have to ramp up other resources quickly to meet that net peak event.'

California has also lost a good deal of the baseload generation capacity that it had in years past, Berberich noted. 'In 2006, we had a lot more capacity on the system, including the now-closed San Onofre nuclear power plant and thousands of megawatts of natural-gas plants that have since closed.'"

Solar and wind are the problem, not the solution.

Andrew Blakers's picture
Andrew Blakers on Jan 5, 2022

When California doubles its renewables penetration it will get to the levels of South Australia: currently 75%, with no hydro, bio, nuclear, coal or geo. South Australia gets along very well with solar, wind, batteries, demand management and gas.

By 2025, South Australia will be above 100% solar/wind on average. It will soon strengthen its skinny connection to the Eastern States, is installing a lot of Utility battery power, and may install some large pumped hydro (its a semi-desert state like Texas, and like Texas has plenty of off-river pumped hydro sites). Gas gen is falling to low levels.

By 2024/25, Australia's National Electricity Market will pass 50% renewables, mostly solar & wind.

California (and the USA) should take a look down under to see how to manage much higher levels of solar & wind. Look outside the box! - its not that hard.

Nuclear is inflexible, runs constant 24/7, cannot load-follow. Someone has to pay for the load-following capability, just like for renewables. Fortunately, load balancing is inexpensive: pumped hydro, batteries, demand management and strong interstate transmission. As a nuclear enthusiast, shouldn't you be keen to support these load-balancing techniques?

Bob Meinetz's picture
Bob Meinetz on Jan 5, 2022

"Nuclear is inflexible, runs constant 24/7, cannot load-follow."

Nonsense. Modern nuclear plants in France and Germany follow load all day long:

"California (and the USA) should take a look down under..."

To learn how to generate half of our electricity burning coal? That's a laugh!

"it will get to the levels of South Australia...."
"South Australia will be above 100% solar/wind..."
"It will soon strengthen its skinny connection..."
"...will pass 50% renewables..."

Ever notice how often the word "will" occurs in pro-renewables posts...how completely dependent renewables are on heightened expectations, miraculous promises, future fantasies? Environmentalists are tired of hearing the word "will"...we want solutions that work now. No more time to waste!

Dr. Amal Khashab's picture
Dr. Amal Khashab on Dec 15, 2021

Facts. For low income people there must be a back payment through solidarity groups and welfare activities. You have to use one balance for all.

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