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Low Electricity Prices – Impacts and Longevity

By January 23, 2017November 6th, 2021Energy Rant

As I’m sitting here reading about topics including electricity prices, electric cars, and utility innovation in Public Utilities Fortnightly, it occurs to me: why are so many organizations and companies in the utility industry named after Edison when the electric car company is named after Tesla? This makes no sense, whatsoever. Edison was the vehement direct current[1] advocate, and Tesla was the alternating current[2] advocate. They were fierce rivals. But the car uses Edison’s direct current, while the utilities, of course, produce and deliver Tesla’s alternating current. I can only conclude that Edison was a better marketer, but I’ll bet he didn’t get naming rights.

Tesla seems to be very full of himself. No wonder Edison is bitter.

Steve Mitnick from Fortnightly writes an opening editorial for each edition and a daily email to subscribers. In the recent January article, he again, after quite a few daily emails on the subject, wrote about record low electricity prices as a percentage of consumer spending. August 2004 saw the lowest electricity cost of all time at 1.3 percent of consumer spending. That was the summer before Hurricane Katrina, after which prices shot up because of disabled natural gas platforms in the Gulf of Mexico.

Natural gas prices drive electricity prices, now more than ever. The following chart, showing data from the Energy Information Administration, is an interesting plot of spot natural gas prices and annualized prices. You can see the Katrina price spike in mid to late summer, 2005. The next price spike was the summer of 2008 – the commodity and housing price bubble that went ploink in the fall and triggered the great recession. Since then, hydraulic fracturing for natural gas seems to have put a long-term, strong downward force on prices.

This brings us to electricity prices. Mitnick reports that the period from October 2015 to October 2016, inclusive, electricity prices were just 1.39 percent of consumer spending. During this period, the second all-time-low price occurred in March 2016, clocking in at 1.32 percent of consumer spending. Incidentally, my household spends more on our dogs than utilities.

Electricity Prices Track Natural Gas Prices

I argued in this blog back in 2012, f(x), where x is energy-cost, that energy, specifically electricity prices, are more a function of fuel cost than of the economy. Mitnick writes 4.5 years later[3] in agreement. He also states that a relatively large investment in rate base in recent years has not had a negative impact on prices. I would add that this is because rate base costs are smeared out over a very long time.

Needless to say, the cost of electricity is remarkably low mainly due to

  1. Ingenuity (fracking) and market forces that brought down fuel prices for a reliable long term;
  2. Utilities moving quickly to take advantage of the cheap, abundant fuel;
  3. A relatively massive buildout of wind energy that shifts a substantial cost to consumers through tax breaks that don’t show up on the electric bill.

Other Timeless Wheels

I also think of my recent Rant regarding Distributed Energy Resources – Messing with Near Perfection. One could say, touché. The unbroken model needs no fixing. Mitnick wrote recently that, “New technology has been introduced where it has been approved as cost-beneficial by state public service commissioners, or where it has emerged superior in competitive markets.” He went on to say “The wheel is among mankind’s oldest technologies. It still works just fine. I’ll bike on over and explain it to you, if need be.” Double touché.

I was reminded of another timeless technology during last week’s AESP Brown Bag presentation by Meg Matt. The topic was networking, and one microtopic was business cards. Don’t forget them. Business cards, like the wheel, are probably never going to become obsolete; nor will direct mail. If you want to get my attention, mail an attractive postcard or bi-fold to my mailbox. Want to truly say thanks? Send a Neanderthalic handwritten note via snail mail.

Low Cost And Efficiency

The discussion above paints a very difficult picture for energy efficiency. How does one cajole folks into cutting their utility bill from a whopping 1.3 percent of their expenditures down to a relatively manageable 1.1 percent of their expenditures?

Clearly, to connect with residential customers, program implementers will need to pull some other emotional strings or strike some other nerves with customers to get them to save energy.

In the same issue of Fortnightly, Chris Gould of Exelon notes a term they coined: “Project Starbucks.” Why do customers buy stuff that makes little economic sense? I.e., why would anyone pay $4 for coffee? I wrote about this last week in Behavioral Economics. More specifically, I wrote about decision making and our industry’s outdated cost effectiveness algorithms a year ago in Drop it and Give me Twenty.

Our industry needs to start accepting the Starbucks effect – more on this next week.

Rising Prices?

Fortnightly describes later in its January edition how interest rates impact everything, but in particular, energy prices. The policies of the Trump administration could have us seeing a wild ride in the next few years. I will discuss this in a couple weeks.

[1] You know, DC, like with batteries, not utilities

[2] AC power that utilities generate and deliver

[3] He probably would have agreed back in 2012 too.

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Jeff Ihnen

Author Jeff Ihnen

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