26/08/2022
Why Are 2022 Electricity Rates Increasing?
Several news outlets have recently written about how electric rates have experienced major price increases over the previous 3-6 months. These higher prices can be attributed to the rising demand for natural gas, and they are expected to continue through the summer:
Natural gas is the largest source of electricity in the U.S., supplying 37% of total generation. Coal generated 23% of U.S. electricity in 2021, but that number will steadily decline as those power plants are retired. Nuclear energy represents approximately 20% of electric generation, and it’s expected to remain the same, while renewable energy including solar and hydro will continue to rise from their 20% level in 2021.
The primary reason for the increase in electricity rates is that natural gas prices are increasing at a faster rate than in the past several years because the Russian supply to Europe and Asia is lower. Additionally, the demand for U.S. natural gas is higher both abroad and domestically, so prices are increasing as a result of this increase in demand.
1. Russian Invasion of Ukraine Impacts Supply and Demand of Natural Gas
Russia is the world’s 2nd largest natural gas producer. (The United States is 1st.)
Russia is the world’s largest natural gas exporter and holds the most reserves.
With the war in Ukraine, supply from Russia to Europe and Asia is significantly down.
European & Asian demand is driving the cost of natural gas much higher.
Europe’s spot Liquified Natural Gas (LNG) prices this past winter were five times higher than their 5-year average, despite a mild winter.
Asia’s spot Liquified Natural Gas (LNG) prices this past winter were four times higher than their 5-year average.
Per the International Energy Administration's Gas Market Report, Q2-2022: “US LNG exports registered a remarkable 50% increase in 2021, and were up by nearly 60% year-over-year in H2, as soaring spot LNG prices pushed US terminals to operate at full capacity in the second half of the year.” Q1 2022 was up 27% y-o-y.
US storage of natural gas is down 16% compared to the national average over the last 5 years.
Storage of natural gas in the European Union is down 30%, even though the spring is typically the optimal time to store reserves in preparation for peak summer demand.
2. Increased U.S. Electricity Consumption Boosts Demand
In 2020, during the pandemic, U.S. retail sales were down 2.5% compared to 2019. While residential sales were higher because people were staying home, commercial and industrial shutdowns impacted that decrease.
2021 electricity consumption was up 2% compared to 2020
The U.S. Energy Information Administration (EIA) projects that electricity sales for summer 2022 will be 0.4% higher.
Residential consumption is expected to be down due to mild weather forecasts.
Commercial and industrial sectors are up because of the growing economy.
If the weather is hotter than forecast, that could significantly increase residential demand, as electric customers use more energy to cool their homes.
Global consumption is expected to decrease slightly, just below 0%.
Europe could experience an estimated 6% drop due to the high fuel prices.
Asia has forecasted a 3% increase.
3. Coal Plant Retirement Creates Supply Constraints
Coal generation plants are steadily being retired.
Coal was 40% of electricity generation less than 10 years ago, but just 23% today.
The EIA projects that planned coal plant closures will continue, despite increasing natural gas prices.
Natural gas had historically low prices in 2016-2020, coupled with regulatory and environmental policies that discouraged the use of coal.
This increased demand for natural gas and renewables affects the East Coast wholesale markets more than other regions that rely on coal the
