High Electricity Prices Will Go Even Higher Unless We Change Course

Inflation remains stubbornly high despite the Federal Reserve’s interest rate increases. Energy has been one of the biggest drivers of inflation: It is up 8.7% over the last year. Even with the mild winter, electricity and natural gas prices are squeezing consumers in many parts of the country. Bringing energy prices down and keeping them low requires prudent investments in energy supplies and transmission lines. Sadly, the Biden administration and several state governments are making such investments harder, not easier.

Electricity prices are up nationwide, but some places are really feeling the pain. As the figure below shows, electricity prices per kilowatt-hour (KWH) started increasing in nearly every part of the country by early 2022. In the New England Census Division—which includes Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire, and Maine—the already high price of electricity was 57% higher in January 2023 than in January 2021. The West South Central Division experienced the second largest price increase, up 36%, over the same period. The smallest increase was in the West North Central, where the price increased by only 7%.

We need to generate more energy to keep prices low and stable. The Biden administration has focused on expanding the supply of wind and solar energy. The Infrastructure Investment and Jobs Act earmarked billions of dollars to fund R&D, subsidized loans, and tax breaks for wind and solar projects. Wind and solar energy can be a useful part of the energy grid, but on their own they will not generate the energy Americans expect.

In a recent essay, Paul Bonifas and Timothy J. Considine explain why variable renewable energy (VRE) sources like wind and solar cannot support the U.S. power grid. Unlike dispatchable energy sources—which can be ramped up or down depending on demand and include natural gas, nuclear, and coal plants—VREs require specific conditions to operate, namely sunny weather and wind. This creates some problems.

First, the wind and the sun are somewhat finicky and are not always around when we want them. Grids that rely on wind and solar need back-up dispatchable sources of energy that can smooth out daily weather fluctuations.

Second, peak energy demand typically occurs in the late afternoon or early evening, but peak solar generation usually occurs a few hours earlier while peak wind generation normally occurs at night. Again, this means that the mismatch between supply and demand needs to be corrected by dispatchable sources or wind and solar energy that is either stored or generated somewhere else and transmitted to where it is needed.

Finally, there is a seasonal problem. Average electricity use in America is higher in July than in January or April, but this demand does not always coincide with the requisite supply of sun or wind.

Since VREs need to be backed up by other sources of energy like natural gas or nuclear power, as more VREs are added to the grid, more dispatchable sources need to be added as well. Currently, about 21% of U.S. electricity generation comes from wind, hydropower, and solar. All this generation requires some kind of backup to maintain resiliency and reliability, and over time this redundancy may dramatically increase costs. As Bonifas and Considine note, “It is unknown what level of VRE can be added to the grid before it breaks or becomes unaffordable.”

In addition to the timing problems, wind and solar power face location issues as well. The deserts of eastern California and western Arizona are very sunny, but do not contain a lot of people. Wind power has the same problem. South Dakota and Wyoming, two of America’s least populous states, also contain some of its best potential wind energy. Maximizing the value of solar and wind energy requires generating power at the source and then transmitting it, potentially long distances, to where people live.

This is not an insurmountable problem, but it is made much more difficult by state laws that impede new transmission lines. As Jim Rossi explains in a recent essay, many of the transmission lines in the U.S. are in need of replacement and modernization. Unfortunately, several states, such as Texas, have or are considering rights of first refusal (ROFRs) that grant incumbent utility companies the exclusive right to build new transmission lines in their states. ROFRs prevent a competitive bidding process between out-of-state and in-state transmission line developers. This reduces innovation in transmission line construction and increases the likelihood of cost overruns, which are then in part passed to consumers as rate increases.

It is hard for transmission line developers to assemble the needed property easements that enable new line construction. Such assembly is more difficult when transmission lines cross state borders, which they often do since electricity grids are regional in scope. ROFRs add to this difficulty by essentially requiring different companies to work on the same line if it crosses a state border, complicating already complicated projects via additional coordination.

States without ROFRs should use a competitive bidding process that allows in-state and out-of-state developers to compete with one another to provide value to consumers. States with ROFRs, such as Texas, should repeal them to help bring down electricity costs.

Once we consider timing and transmission issues, the value VREs bring to the grid is less obvious. Supporters of wind and solar often point to their falling levelized costs of electricity (LCOE), which is a measure used to quantify the cost competitiveness of different energy technologies. In their essay, Bonifas and Considine acknowledge that on an LCOE basis, onshore wind and standalone solar are relatively cheap. But when intermittency and storage costs are considered, natural gas combined cycle (which uses a gas and a steam turbine to create energy) is comparable to standalone solar and better than hybrid solar or wind. When tax credits for solar are not included, natural gas combined cycle is the clear winner.

Timing and transmission problems mean we will need natural gas, oil, nuclear, and other non VREs for the foreseeable future. Despite the importance of these energy sources, the Biden administration continues to make it difficult to find new supplies. The administration recently let the Department of Interior’s oil and gas lease program for the outer continental shelf expire, which is unprecedented. It can take seven to ten years for a company to produce energy once it secures a lease, so while this program’s lapse will not affect the energy supply today, it will decrease the supply in the future if it is not promptly restarted.

America is blessed with abundant supplies of energy: Natural gas, oil, and space for wind, solar, and nuclear are all readily available. We are also an innovative society, and the technologies for using these resources are improving all the time. Only policy failures that ignore reality can prevent us from enjoying affordable and reliable energy far into the future.