Wednesday, December 14, 2011

Grid Power Prices Hit Record High, Boosting Distributed Generation

Yesterday USA Today had a front page story entitled: "Electric bills soar $300 in 5 years."  See  The piece goes on to say that residential bills hit a record high of $1,419 per year on average.  While USA Today does not discuss distributed generation or on-site power like solar, the rising cost of grid power puts wind at the back of distributed power.

USA Today attributes the grid power bill increases to higher usage than 20 years ago and higher rates caused by "higher fuel prices and the expense of replacing old power plants, including heavily polluting--but cheap to operate--coal plants that don't meet federal clean air requirements."  Not quite right. 

Coal costs have gone up an average of 6.5% per year for the last 10 years, a significant increase in fuel costs to electricity utilities. It is one of the reasons that coal's market share has fallen from 52% to 43% this year and will fall further.

But not all fuel costs have gone up.  Natural gas prices have actually fallen sharply since 2009 due to the shale gas boom.  At current gas prices, gas plants today are  cheaper to operate than coal plants. Wind, hydro and other renewables often have zero fuel cost and renewables account for about 13% of all electricity in the USA.

Apart from painting with a broad brush on the role of fuel costs in electricity price increases, USA Today does not explain the difference between a monopoly generation and a competitive generation state and writes the piece as if the entire country had regulated, monopoly generation utilities.  In monopoly states, all costs--fuel costs and capital building costs--are recovered from captive electricity ratepayers.  As coal costs have marched upward over the last 10 years, the much higher costs of coal have been automatically paid for the electricity ratepayers of monopoly utilities.

Yet, in a competitive state, fuel or any other costs are not automatically recovered, since prices are not tied just to costs, but are set by supply and demand. The imperative of the competitive market is to use low-cost fuel (wind is free), use all fuel as efficiently as possible, and deploy low capital cost, reliable technology, with gas plants offering much lower capital costs than coal, nuclear or any other technology. 

Regardless of their costs, competitive plant owners only get paid whatever the market price is and only if they generate power.  Monopoly regulated plants, however, normally earn revenue for their owners whether they run or not, because once a plant is placed in rates, customers keep paying for it almost no matter what.

Another source of electricity rate increases is the transmission and distribution or the electricity delivery system to carry power from often distant central power stations to homes and businesses.  These costs were not mentioned by USA Today but range from 3 to 6 cents per kilowatt-hour for many residential customers or about 30% of the typical bill.

Putting aside these quibbles, the basic point of the USA Today piece that grid power electricity prices are going up is correct and is another reason why the future of distributed generation--power production at the site of the customer's home or business--is bright.  For example, solar grid parity is a function of both the price of grid power and the price of solar power. 

Solar power prices are falling rapidly and grid power prices are rising, bringing forward the date when solar power will cost no more or less than power from the grid. The article points out that grid power costs 26 cents per kilowatt-hour in New York City.  At that price point, solar power is cheaper and so are many other alternatives--like cogeneration or major efficiency retrofits--to grid power.

Grid power is progressively losing its economic advantage and will soon thereafter lose customers.  Once a tipping point is reached, customer loss will be fast and heavy.  That tipping point is just 3 to 5 years away.

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