Electricity prices typically move in one direction: up. But for the first time in more than a decade, residential electricity prices have dropped nationally. The drop is nearly one percent on average, according to the U.S. Energy Information Administration.
Regionally, however, the picture can be very different. Here’s a state-by-state look at how electricity prices have changed from the first half of 2015 to the first half of 2016:
What is responsible for the price drop across much of the nation? Cheap natural gas.
Utilities are constantly building new infrastructure – from transmission lines and power plants, to wind farms and gas fields. Those improvements cost money, and those costs are passed on to customers. EIA analyst Tyler Hodge said, “Those continuous improvements are one of the reasons we don’t often see a decline in prices.”
But natural gas prices have been low, which means the price of generating electricity at natural gas-fired power plants has also been low. The price drop has been enough to offset the capital costs of those infrastructure improvements.
Nationally, about a third of our electricity comes from natural gas-fired power plants. EIA data shows that, across the country, we saw an average price drop of 0.12 cents per kilowatt-hour in the first half of 2016 compared to 2015. It’s a change Hodge noted is small, but significant – because price declines are so rare.
One more wrinkle: Natural gas prices have been low since 2010, electricity prices didn’t decline until 2016. Why the lag? Colorado School of Mines economist Ian Lange said one possible explanation is that at the beginning of the low-price era, many states took that opportunity to increase their investments in new infrastructure. After a few years, those investments leveled off, which is why the decline in electricity prices is only now evident.
For Inside Energy’s focus states, we’ve seen…
- In Colorado, a two percent decrease in prices, from 12.0 cents per kilowatt-hour in January through July 2015 to 11.76 in January through July 2016
- In North Dakota, a five percent increase in prices, from 9.57 to 10.05 cents per kilowatt-hour
- In Wyoming, a two percent increase in prices, from 10.84 to 11.06 cents per kilowatt-hour
Note that prices in all of these states are below the national price average, which is 12.47 cents per kilowatt-hour.
What’s going on in each of these states?
Colorado is a pretty good reflection of the national picture. Although there are still many coal-fired power plants in the state, nearly 30 percent of electricity generation now comes from national gas.
But North Dakota and Wyoming have very few natural gas-fired power plants, with 70 and 87 percent of electricity generation coming from coal-fired power plants, respectively. With few natural gas plants, they aren’t seeing the benefits of low gas prices when it comes to electricity generation. Plus, as University of Wyoming economist Rob Godby pointed out, coal is also facing the task of complying with environmental regulations, which has increased costs.
State by state, the economics of power generation is also influenced by how utilities are regulated – or, in some cases, not regulated.
Nationwide, this price dip may be short lived. Natural gas prices have already started to rebound, and the EIA projects that this trend will continue. And electricity prices will likely follow suit.