Electricity Affordability in Energy Transformation Era

The signpost is clear. Residential electric consumption has become the most affordable in recent American history. As reported by Public Utilities Fortnightly in a March 2020 communication, "residential electric bills of Americans were just 1.22 percent of all personal consumption expenditures this January. Since the U.S. Department of Commerce started reporting personal consumption expenditures in detail, sixty-one years ago, that percentage has never been lower." It's worth noting that since 2017, this metric has fallen below a historical floor of 1.3 percent approximately one-third of the time.

While the affordability metric is clear, uncertainty exists regarding the future direction of this trend. A key question for further exploration is, how sustainable is the downward trend in electric pricing? This is especially uncertain given the transformative forces across the industry that aim to increase electric energy use, along with countervailing drivers that are simultaneously seeking to curtail electric consumption. 

For example, increasing decarbonization policies at the state and local levels are introducing cleaner, fossil-free forms of energy supply across multiple sectors, such as power production, transportation, and buildings. These policies are expected to increase electric energy consumption, especially where cleaner fuels (hydro) are available for power generation.

According to the U.S. Department of Energy, electric vehicles will receive more than eighty percent of their total charging needs at home. For a daily commuter, this will have a noticeable impact on the average residential electric bill, even though total consumer spending on transportation may decrease.

In contrast to this trend, there are growing efforts to reduce total electric energy costs due to the transition to lower-priced fuels (such as natural gas), energy efficiency policies and investments, and increased consumer awareness of their real-time energy consumption and costs. For residential consumers with smart electric meters, having near-real-time energy consumption information can lead to simple changes in energy consuming behaviors that reduce energy levels up to eight percent.

These market forces are impacting the industry, but new trends are also emerging. Downward electric prices are being supported by the increased sourcing of low-cost, abundant, natural gas supply from fracking operations. Downward pressures are further driven by accelerating innovations in energy conservation coupled with adoption incentives. 

The biggest impact on energy efficiency in the last couple of years has been the adoption of LED lights, as well as improvements in energy-efficient appliances and the expansion of real-time rates. Automated energy control units such as programmable thermostats will become a normal addition, and we expect to see growth in private and community-based solar PV as costs decline. 

Natural gas has had the greatest market impact. 

The U.S. Energy Information Administration estimates that natural gas production from hydraulically fractured wells now makes up about two-thirds of total U.S. marketed gas production, which is up sharply from about seven percent in 2010.

Despite increased growth in natural gas usage and net export volume, supply continues to outstrip demand, resulting in prices below $2/MMBtu, the lowest prices in real terms since the 1970s. Low-cost gas has driven increased electric to gas conversion, particularly in new construction, and supported the early replacement of a large percentage of the nation's legacy coal fleet.

On top of favorable fuel price trends, energy efficiency improvements have accelerated. According to a recent report, 2019 State Energy Efficiency Scorecard, from the American Council for an Energy-Efficient Economy, we are seeing increased energy efficiency policies and spending. 

Key trends include the following:

Savings from ratepayer-funded electric efficiency programs in 2019 remained fairly level compared with the prior year's results, totaling approximately 27.1 million megawatt-hours. These savings are equivalent to about 0.73 percent of total retail electricity sales in the U.S in 2018.

States continue to update and strengthen residential and commercial building energy codes.

It was an especially big year for state appliance standards. Four states - Washington, Colorado, Hawaii, and Nevada - are adopting new laws with an additional six states and the District of Columbia filing bills for similar laws.

On a national basis, the U.S. Department of Energy publishes appliance and equipment energy efficiency standards for nearly sixty different types of residential devices, covering more than ninety percent of typical household energy use. According to the DOE, American consumers saved sixty-three billion dollars on their utility bills in 2015. By 2030, cumulative operating cost savings from all standards in effect since 1987 will reach nearly two trillion.

The third key force driving electric affordability is increased growth in private- and community-owned solar PV, offsetting utility growth in rate-based increases. One can argue that with up to thirty percent of their investment in solar energy being subsidized by federal Investment Tax Credits, and with a handful of states having offered additional tax incentives, residential owners of private solar have benefitted from the more than two million solar panels installed over the past decade. 

Installed solar system prices have declined significantly during this time, enabling private and community-owned solar PV to reach grid parity in many areas, resulting in further electric cost savings to consumers. With the expected phase-out of the ITC for residential consumers, a key question is how the installed cost and growth of solar will continue to drive down the Commerce department metric.

The relative balance between these countervailing downward and upward price pressures may be at an overall inflection point - or at least a point of slowing. Many uncertainties should be considered, among others: 

Systemic Disruption of Unconventional Gas Supply - The key question is how high and rapidly will gas prices rise due to anti-fracking politics, accelerating field depletion rates due to potential reduced investment, and the impact of economic disruption on the delicate balance sheets of some of the major unconventional gas producers due to global oil market weakness and impact of fracking economics. It is estimated that a significant portion of fracking is only profitable at around $50/bbl.

Reduced Gas-to-Electric Conversion - Regardless of natural gas price trends, another key uncertainty is how pervasive will policies or orders banning the use of natural gas for residential end-uses become, and what will be the impact on electric demand.

Increased Electrification - The continual adoption of electric vehicles, coupled with powered home and personal devices, will increase the demand for electricity. A key uncertainty is how much of that electricity demand will be satisfied by distributed versus centralized sources. California's Rule 21 mandate requires all new residential construction to include rooftop solar, and those types of mandates are likely to find their way into other state regulatory decisions.

The Cost of Grid Transformation - Given that the majority of new power generation capacity is in the form of intermittent renewables, coupled with an increasing focus on a more resilient and reliable power grid, grid transformation costs will naturally need to increase and be recovered in future electricity costs. One industry report suggests that one and a half to two trillion dollars will need to be spent by 2030 alone.

The Level of Green Energy Ancillary Costs - What will be the impact of transition costs that are often hidden in energy personal consumption data due to DER installation and premise control?

Rising Utility Service Fees - As residential customers adopt increasing levels of solar PV electric power self-generation, utilities will continue to support their fixed-cost infrastructure with potentially fewer electric energy sales, creating further pressure to increase service fees to support the power infrastructure investment.

The Advent of Residential Demand Charges - In addition to variable service fees, fixed demand charges may be adopted/expanded to support back-up power.

Reduction in Conservation Incentives - Some utilities are seeking to apply subscription-based pricing, which advocates a bundled price for electric energy combined with energy-related products and services, which may naturally reduce energy conservation incentives.

While it may be compelling to assume that the electric affordability index will continue to decline, many uncertainties could make this trend unsustainable over the next decade. As we move forward with the renewable and distributed energy transformation, we must understand these factors to proactively manage customer expectations, develop strategies to ensure the financial health of the backbone utilities, ensure transition costs are digestible, and facilitate regulator alignment and support.

While daunting, these challenges also present learning opportunities. Ultimately, learning what works and what doesn't work early in the transformation will help separate success from failure, and maintain affordable energy for all Americans.