The U.S Energy Information Administration (EIA) recently released its Short-Term Energy and Winter Fuels Outlook (STEO), highlighting steady increases in electricity costs — notably 40 percent over the past decade — and projecting further increases next year. With regulations pending on all parts of the supply chain, from the natural gas wellhead to the power plant smokestack, the trend of greater utilization and higher costs will continue. Congress should be concerned.
{mosads}Today, the affordability issue seems to be losing resonance in the nation’s capital and in many statehouses. The reasons are many: concern over the environment and the need for cyber-security upgrades, investments in the grid and build-out of new and advanced power generation.
Regardless of your views on the myriad of regulation, policymakers need to understand that these factors in combination will alter policy that has its roots in the Depression Era. Since the launch of President Franklin Roosevelt’s New Deal, a social contract has existed among regulators, consumers and utilities regarding the cost of electricity: Prices will be set as low and predictable as possible. Even today, the mission statement of the Rural Utilities Service, a New Deal descendent, includes: “Providing reliable, affordable electricity is essential to the economic well-being and quality of life for all of the nation’s rural residents.” For rural America and lower-income electric consumers in particular, higher utility bills instill real pain and stall economic growth.
Compounding the problem is that programs aimed at providing cost predictability, such as averaging consumers’ monthly bills, are being challenged. Many utilities are now passing along volatile feed stock costs and initiating peak-pricing regimes that allow higher prices to be charged during high-demand periods. The result? The loss of cost predictability that regulators have sought to provide consumers over the years.
EIA’s confirmation of rising energy prices and mounting pressure on rates begs the question as to whether this is a purposeful shift by policymakers away from a historical “low price” approach. Regardless, policymakers must consider the consequences of such a policy shift, particularly for lower-income consumers, commercial users and industrial users.
Electricity use can only be affected without pain on the margins. There are only so many lights that can be turned off and thermostats adjusted. Efficiency efforts can only mitigate so much of the cost and is not inexpensive in it own right.
Similarly, for industrial and commercial users, there is limited elasticity in energy use. Stores must be open when customers want to shop and companies cannot randomly move production shifts to leverage price variation without disrupting operations. The fact is, efficiency is a competitive requirement and businesses have been implementing such measures for years. Wringing more energy efficiency out of their processes is not an easy or inexpensive proposition. More efficient equipment will occur primarily within the normal replacement cycle, and even then, the most electricity efficient option will need cost justification.
In a high-price electricity regime, employers either adapt or flee. In Germany, heavy electricity users are moving off the grid. The Wall Street Journal recently quoted the executive director of the German Chamber of Commerce as saying that every sixth German company generates its own power. Another story quoted an asphalt manufacturer who installed solar panels to keep his road tar warm” “It’s been a great way to save some money.” He added that producing his own energy is good because electricity prices in Germany are constantly rising. Going “off the grid,” however, is not without complication. Germany, which already imposes an energy surcharge for on-grid generators, is contemplating similar fees for off-grid users to deal with the country’s funding shortfall.
So, how can we maintain a price point that allows manufacturers to compete and low-income users to have access to affordable electricity? And, is there a new model for electricity providers here or overseas?
Backing into new policy is never a good idea. It’s always better for industry, Congress and regulators to collaborate and start with clear and distinct goals. I would offer two recommendations for their consideration: Reaffirm their historical commitment to minimize electricity costs for end users and consider the negative impact of more regulation and higher infrastructure costs on consumers. Instead of debating whether a utility can afford a new mandate, they should debate what’s best for customers and what safeguards are necessary to ensure that our economy is competitive in the global marketplace.
Maddox is a former senior official at the U.S. Department of Energy, a fellow at the American Action Forum and is associated with the Livingston Group.