Fact Check

Fact Check: What really causes electricity prices to change?

Fact Check: What really causes electricity prices to change?
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A Forbes article by Michael Shellenberger came out this week, focusing on retail electricity prices and how they’ve changed over time. It also asks an important question – what causes retail electricity prices to change?

While the article is correct about wind and solar energy’s recent cost reductions, it unfortunately misses the mark when it comes to explaining why electricity rates change over time. It also makes an incorrect claim that price increases are tied specifically to wind and solar energy growth.

Let’s take a closer look at the facts.

Fact #1: Wind costs are declining

The article’s first claim is certainly true that wind and solar energy costs have dramatically decreased in recent years.

Since 2009 the cost of wind energy has fallen by 67%, and it is now the cheapest source of new generation in the Midwest and other regions of the country. Electric utilities like Xcel Energy have stated they are investing in wind “because of the tremendous economic value it brings to our customers” at no cost to grid reliability.

Technology advancements and supply chain efficiencies have helped to propel wind costs to historic lows, most recently reflected in an all-energy-source request for proposal (RFP) released in Colorado. Xcel Energy received over 400 bids in response, and wind power posted the cheapest responses by a significant margin, clocking the lowest median bid of $18.10/megawatt hour (MWh).

Importantly, these cost declines translate to consumer savings. In Oklahoma, the planned 2,000 MW Wind Catcher project is expected to save customers more than $7 billion, net of cost, over 25 years.

Fact #2: Retail electricity prices have remained relatively flat

When looking at the United States as a whole, it becomes clear that retail electricity prices have generally remained flat or declined in recent years. The Energy Information Administration (EIA) shows that, when adjusting for inflation, real national average retail electricity prices increased by only 0.3% over the past five years and actually fell by 2.3% over the past 10 years.

Unfortunately, Shellenberger chooses to focus on how California nominal retail electricity prices increased by 23.7% from 2011 to 2017 while ignoring inflation adjustments. Two flaws emerge from this focus.

First, adjusting for inflation would show that real retail electricity prices increased by 13.5% from 2011 to 2017, not by 23.7%. Second, California should not be considered representative of the entire country, and should not be considered the only state with significant renewable energy growth in recent years.

It is true that real price changes do vary depending on the state. For example, Texas is the undisputed leader for wind power and hosts one-quarter of the country’s installed wind capacity. However, real retail electricity prices have not increased in Texas – to the contrary, average prices actually decreased by 28.5% over the past 10 years.

Shellenberger also points to recent price increases in Denmark and Germany, arguing there is a connection between renewable energy growth and price increases. U.S. electricity prices should never be compared to European countries with entirely different market conditions and price formation structures.

Fact #3: Retail electricity price changes are due to many factors

Looking back to the article’s main question – what causes retail electricity prices to change? Shellenberger incorrectly claims that changes in a customer’s retail bill are linked specifically to renewable energy growth. The truth is that retail electricity prices are calculated according to a number of factors, many of which are unrelated to wind and solar energy, including:

  • New transmission and distribution investments
  • New power generation investment
  • Existing infrastructure upgrades
  • Environmental regulations
  • Fuel costs
  • Extreme weather conditions
  • Customer type
  • Many others

In regards to fuel costs, wind and solar energy have zero fuel costs and actually provide a hedge against future fuel price volatility. And when extreme weather conditions arise, wind energy has provided valuable electricity when grid operators and consumers need it most. Wind power saved consumers $1 billion over just two days during the 2014 Polar Vortex and performed above average during this year’s Bomb Cyclone event.

Because wind and solar energy costs have dropped to historic lows, it makes sense that retail electricity prices are calculated due to more factors than renewable energy growth alone, and that wind and solar energy actually provide valuable services that help consumers save money in the long run.

Fact #4: Grid operators are integrating wind energy in a reliable and cost-effective manner

Shellenberger makes a final misstep by arguing that wind and solar energy’s variability forces utilities and grid operators to implement cost-prohibitive measures to integrate these resources onto the larger electricity grid.

Grid operators are the experts here, and they’ve confirmed multiple times that large amounts of renewable energy can be integrated into a diverse energy mix in a cost-effective manner. A 2014 PJM study showed that, with adequate transmission and ancillary services, the grid operator “will not have any significant issue” integrating 30% of its electricity from renewables.

Bruce Rew, SPP Vice President of Operations, recently stated, “Ten years ago we thought hitting even a 25 percent wind-penetration level would be extremely challenging, and any more than that would pose serious threats to reliability. Now we have the ability to reliably manage greater than 50 percent. It’s not even our ceiling.”

Today, four states—Iowa, Kansas, South Dakota, and Oklahoma—generate more than 30% of their electricity from wind energy. MidAmerican Energy expects to be 90% wind-powered in the near future, and the entire Southwest Power Pool, a grid operator serving 14 states, was 23% wind powered in 2017.

The truth is that all forms of energy impose integration costs on the power system, but it is far more expensive for grid operators to plan for and accommodate large conventional power plant failures. The data show that increasing the use of existing flexible generators to accommodate wind and solar energy costs only pennies on a typical electric bill.

Conclusion

It’s not easy or simple to determine what causes retail electricity price changes. To the contrary, these changes are determined by a number of factors, and are not solely based on renewable energy growth. The good news is that prices have generally remained flat or declined in recent years, and that wind power remains a reliable, cost-effective solution that helps keep the lights on for families and businesses across the country.

Fact Check

Hannah is AWEA's Senior Analyst, Industry and Data Analysis. She is focused on wind industry data and analysis, with applied GIS experience. Hannah joined AWEA in July 2014 after receiving her Master of Public Affairs (MPA) degree at the Indiana University School of Public and Environmental Affairs (SPEA), with previous positions held at the Tennessee Valley Authority (TVA) and the Government Accountability Office (GAO).

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