Published: April 12, 2024
By: Concentric Staff Writer
Part 1 of a 3-Article Series
Energy affordability for American households and businesses is surging to the forefront of the conversation among energy regulators and industry, bringing the issue into sharper focus and leading to efforts to develop solutions.
Energy bills are rising for all customer classes, increasing the public profile of the energy affordability problem, with utilities and regulators responsible for mitigating costs. This is occurring as state regulators and utilities are also being expected to transition to a cleaner grid while simultaneously maintaining energy reliability.
Experts from Concentric Energy Advisors provided their perspective on the many facets of the energy affordability conversation surrounding electric and gas service. Customer choice, privacy, effects on lower-income customers, and other considerations are among the factors in play as state regulatory commissions grapple with rate cases and struggle to keep the energy transition affordable.
The consensus is that at the present time, the transition from fossil fuels to 100 percent renewable and zero-emission resources is not affordable for utilities or for customers. While affording energy bills is already a profound struggle for many, the real energy affordability crunch is perhaps 10 to 15 years away, depending on location, Concentric’s Chairman John Reed said.
Affordability is “the single most challenging issue that regulators, and therefore our clients and therefore we, face,” Reed said. The issue of affordability is also the greatest challenge to widespread decarbonization, which is a situation that has received more attention over the past five years in the Northeast, California, and some of the Upper Midwest states, he said. Increasing decarbonization mandates and policies exacerbate the technological challenges in reaching “net zero,” Reed said.
“It is quite clear that that transition will be very expensive,” Reed said. “It’s going to put substantial upward pressure on rates.”
Reed estimates that some energy customers that recently had a monthly bill of $150 could see that rise to $600-$1,000 per month in the next 10–15 years if decarbonization programs are truly implemented to reach net zero by 2050. This will create a pushback among customers, and “there’s going to be a political backlash associated with electricity bills that increase at anything like that rate.”
“How will customers feel about their electricity bills being $1,000 a month?” he said.
As more technologies and sectors electrify, electricity bills will also cover heating, lighting, refrigeration, and some transportation costs, and residential power bills could potentially rival rent costs, Reed said. Adding to these costs will be replacing older appliances with more efficient units.
Some areas in the U.S. will need cold-weather heat pumps, but exclusive reliance on heat pumps means that when people lose electricity, they also lose heating ability. This might lead them to opt for backup fuel sources like natural gas or even wood, which have a higher carbon dioxide footprint.
“The place where the rubber will hit the road first is customer choice,” Reed said, adding that this will be true regarding gas appliances, heating equipment, and electric vehicles. On the power generation side, adjusting the price of new renewables such as wind and solar for the energy transition can involve shifting costs from electricity ratepayers to the general public through tax subsidies, he noted.
However, on an unsubsidized basis, some renewable generation is still about twice the cost of conventional generation resources, and renewables also require backup resources such as fossil peaking units. Energy storage is still “very expensive,” Reed said, bringing the cost even higher.
Of the quadrupling of electric bills: “I think that’s a realistic expectation before we hit net zero,” Reed said. This is true in the Northeast U.S., in states like New York and New Jersey, and other states with aggressive energy policy goals such as Minnesota, California, Oregon, and Washington, and some Canadian provinces. Reed noted that these are all areas with different energy systems and resource mixes.
“Understanding the regional difference is really important right now to understanding affordability,” he said. Rates can vary widely in different regions, creating different economic and political pressures depending on the region or area. Many areas with the most aggressive clean-energy policies, such as California, New York, and Massachusetts, have generally higher costs of living, increasing cost pressure on customers.
There are also questions about whether 100 percent net zero policies are worth the investment, depending on political attitudes, as closing the last gap to net zero can cause costs to dramatically increase.
“I think it is time to ask the realistic question of whether net zero is the right answer for 2050,” Reed said, adding that in addition to decarbonization, the conversation should include carbon capture and sequestration for power plants.
Electrification needs to be affordable and beneficial, Reed said. For example, banning all capital expenditures on natural gas infrastructure would remove customer choice. Another example is shifting natural gas usage in homes to natural gas power plants that generate power for the homes as they electrify, which could result in higher carbon emissions. This means it might be premature to replace appliances and vehicles with electric models before the grid and wholesale markets are more fully decarbonized.
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All views expressed by the article contributors are solely the contributors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, related companies, or clients. The contributors’ views are based upon information the contributors consider reliable at the time of publication. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.