Double Digit Rise in Electricity Prices to Continue in 2023

by | Jan 26, 2023 | Biden Administration, Blog Articles, Energy, Finance, Inflation, Politics

There have been many sighs of relief exhaled across the United States in recent days as inflation continues to slow.

New data shows that Consumer Price Index (CPI) inflation has declined for the sixth month in a row, down from 9.1 percent in June 2022 to 6.5 percent in December 2022. This is all well and good, and a welcome reprieve. But we shouldn’t lose sight of the fact that consumer purchasing power has declined by some 15 percent in two years, and inflation remains well above the Federal Reserve’s target inflation rate of 2 percent.

Nor should we forget that the aggregate CPI figures underrepresent what the American consumer is experiencing in two important and fundamental ways. The first is that the costs most important to most Americans, namely, food, energy, and shelter, have risen much higher than aggregate CPI. Secondly, the CPI figures (which compare one year against the previous) tend to hide the “base effects” of inflation, meaning the compounding of rising prices over multiple years. The result of both is to distort and underestimate the real impact on the shrinking wallet of the American working and middle class.

Take the cost of electricity as an example. According to the CPI data provided by the Bureau of Labor Statistics (BLS), the cost of electricity has risen by 14.3 percent over the past year through December. In urban areas, i.e., where most people live, it’s even worse, with the U.S. city average cost of electricity per kWh up by 16.2 percent over the same period. Either measure is well more than double the aggregate CPI figure as a whole. If you happen to be among the tens of millions of Americans who live in the benighted and costly cities of the Northeast, the price increase has been 22.8 percent.

At the same time, these figures mask the longer-term rise in electricity prices from the eve of the pandemic. Looking at the three-year period from October 2019, i.e., just over a year before inflation began its inexorable march, data from the Energy Information Administration shows a 23.3 percent overall increase in the U.S. average cost of electricity per kWh. Drilling down further into the data reveals that over the same period, U.S. residential and industrial customers have fared worse, with average retail electricity costs to those sectors up by 25.6 percent and 25.9 percent, respectively. This sharp rise in power costs for the U.S. manufacturing base is a driving force in rising price levels overall.

Unfortunately, the pain of electricity price inflation isn’t over. As a regulated market in many regions, electricity cost increases take time to manifest in customer prices. For example, in Florida power companies have recently proposed raising prices in 2023 to recover the costs of natural gas fuel price increases from 2022. Specifically, Florida Power & Light is proposing to raise prices by an additional 10 percent in 2023, while Duke Energy is proposing a 20 percent price increase. Similar patterns exist across the country. California’s beleaguered power company, PG&E, is proposing an average 18 percent increase in prices for residential customers in 2023, with additional annual increases through 2026. None of these increases figure into the inflation statistics above.

Before we Americans start to feel overly sorry for ourselves, it’s worth noting that the situation in Europe is much worse. In many countries across the continent, the cost of wholesale electricity has increased more than four or five-fold in the two-year period ending December 2022. You’ve read that figure right. The cost of European electricity has increased by 400 percent to 500 percent or more. For example, wholesale electricity prices are up 459 percent in France, 489 percent in Germany, and an eye-popping 687 percent in Sweden. These figures compare to a mere doubling or tripling of wholesale prices (depending on region) over the same period in the United States.

The War in Ukraine, and in particular the sanctions and blockades imposed on Russian energy shipments to Western Europe, certainly account for much of this increase. However, the cost of electricity in Europe had begun to rise materially by mid-2021, long before Russian troops crossed the Ukrainian border in February 2022. The reasons for this are clear. The EU member countries and their leaders have been on a lemming-like march towards the energy crisis cliffs for years. They have abandoned their national resources and technical capabilities in traditional sources of energy in pursuit of a quixotic green utopia of zero carbon.

France, once not just energy independent but supplying Europe with 25 percent of its electricity from its world-class nuclear power base, set itself on a course for self-destruction years ago when it determined to decommission the majority of its reactors. With most of its reactors under repair, missing replacement parts, or in a decommissioning process, France had to cut its power output by half and endured blackouts in the heatwave of summer 2022. Similarly, Germany, once a leader in domestically produced coal power using advanced and clean scrubbing technologies, handed the keys of its electrical grid to its historical adversary through its short-sighted migration to dependence on Russian natural gas. These errors are not quickly undone.

The lessons for the United States are clear. The keys to lower electricity prices in this nation include recovering our energy independence, pursuing a wide diversity of sources (gas, coal, hydro, nuclear, solar etc.), encouraging innovation, and reforming an ossified, outdated, and overgrown regulatory environment that stifles growth and hinders project financing. We must remove the self-defeating legislative, regulatory, and bureaucratic obstacles and red tape that currently retard progress toward development and entrepreneurship, and the lower prices that will result from both.

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