And U.S. electricity prices are relatively low
Richard W. Caperton
We often talk about electric rates as if the only thing that goes into determining them is the power source. In some sense, this is right: If a utility’s power costs go up, and nothing else changes, the price they charge consumers will likely eventually go up.
But, this understanding doesn’t fully appreciate the role of rate design in determining what the rate will be. When utilities – and utility regulators – design an electricity rate, they make numerous decisions that impact the price that consumers will ultimately pay, regardless of power source. Ignoring these other decisions can lead to lazy thinking about rate impacts, which can ultimately lead to poor decision making.
For example, the standard canard is that “renewables make rates go up.” Depending on the particular circumstances of any one utility, it may or may not be true that renewables are more expensive than fossil fuels (although the conventional wisdom that renewables are more expensive is almost certainly overstated). Directly linking this to the final rate impact, though, ignores all of the other things that go into electric rates.
We can look across the ocean to see some examples of how different design decisions impact rates. The European Union has modern electricity markets and their electric power system is similar to the United States’ in many ways. But, European households not only pay higher prices for power than the United States, but the prices vary dramatically across Europe. This is not just because they have different generation profiles (although this may play a role), but is also because they have different rate designs.
Here’s a chart showing the rates that residential consumers pay for electricity in Europe and the United States. The chart shows the rate that a consumer pays if they use either 3500 or 7500 kilowatt-hours of electricity per year. The European rates were converted into dollars using a 1.5 USD to 1 EUR exchange rate. (For comparison’s sake, I’ve included the United States, where the average consumer uses over 11,000 kilowatt-hours per year. This data is not differentiated by consumption level.)
There are at least two interesting things here. First, you’ll see that every country has higher rates than the average residential rate in the United States. Second, you’ll see that in some countries, rates go down as you use more power, but in other countries, the rates actually go up as you use more power. Since the simplest electric rates are made up of a fixed charge (to cover the fixed costs of the power system) and a per-kilowatt-hour charge (to cover the variable cost of generating power), it makes sense that average rates would decline with higher usage (because the fixed costs are spread over more kilowatt-hours). This is the case in most places in Europe. But in Italy, the Netherlands, Slovakia, Sweden, and Greece, bigger users pay more for power, which is an indication that they have a rate system that encourages efficiency. This is a choice that they’ve made, and a rate impact that is unrelated to their generation source.
Then, we also can look at data about how electric rates in various European cities are driven by taxes and distribution charges; that is, the things that aren’t strictly driven by power generation. (Again, I’ve included the United States for comparison’s sake, but I only have data for the rate with all of the charges, not just power.)
Here we see just how much taxes and distribution charges drive rates. A consumer in Copenhagen, for instance, pays more than 40 cents per kilowatt-hour for electricity, but less than 10 cents of that is related to actually generating power. In London the effect is much smaller. So, even though London’s power is more expensive, their consumers pay lower overall rates. This is another example of a rate impact that is unrelated to the generation source.
We should be skeptical when anyone attributes their electric rates to the type of power they use. And, we should be just as skeptical when someone tells us that our rates will necessarily go up because of the type of generation we use, ignoring all of the other choices that utility executives, elected officials, and regulators make in determining a rate.
NOTE: This post builds off of a column last week that compared electric rates around the world. Regrettably, some of the data from that column contained errors, as several commenters pointed out. Most problematic, some of the data points were based on published tariffs and were not comparable to each other. While these errors do not negate my basic argument, I apologize for the mistakes and confusion, and appreciate the feedback.
– Richard W. Caperton, a Senior Policy Analyst with the Energy Opportunity team at American Progress.
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Thanks, this is some needed information. As a low electric rate paying American, I’d never considered that rate structures are very different in different countries.
Just guessing, American electric rate structures were developed with the help of the electric utilities.
In other countries, they were part of a much larger energy plan.
Texas is the perfect example. Our failed attempt at semi-deregulation of electric utilities has caused our rates to be comparable to the more expensive European countries. About 15 cents per KW Hour seems to be typical here in Houston w/o taxes and distribution charges. I imagine if rate payers had been asked to pay the extra cost in order for Texas to use all renewables; there would have been revolt. But when faced with the increase and the explanation that it’s just business, everyone kind of accepted it. People can be very odd.
I’m on an all wind plan and pay 18 cents KWH. With the taxes and all included, and by leaving the AC set at 75 instead of 74 and with decent insulation, I pay much less than my neighbors or friends. The differences in generation costs, in my opinion, are unimportant in determining the final monthly bill.
I see this as the big strength of self or community (non-profit) generated electricity. Little transport charge, no taxes, no corporate overhead. I bet Texas republicans try to start taxing self-generated electricity just as they are now trying to put an extra tax on cars that get good gas mileage (really, how much wear and tear on roads does a honda fit cause compared to a ford dually?). What a bunch of hypocrites.
Andy, you need to change your retail electric provider. You can do WAY better than $0.18 per kWh. Go to the power to choose website. There are plenty of 100% renewable plans for under $0.10 per kWh.
In Washington state the rates that retail utilities can change customers are set by the state utility commission. While this might be different depending upon the retail utility, I pay a monthy $6 as basic charge just for being connected to the grid. For the first up-to 600 kWh/month I pay 6.8+ UScents/kWh. There are two higher steps so that use above 600 kWh/month the rate is about 7.5 UScents/kWh and I don’t know about the max usage rate since I never have used that much (and rarely step into the second category).
My utility only buys a little power from BPA (and so at the Mid-Columbia Hub spot price for wholesale power), but for comparison of retail cost versus wholesale cost, the hub price is around 2.75 UScents/kWh with wide variance. The point is that the distribution costs are real and have to be met; its just that all the costs are lumped together in rate setting.
The generation prices are low because of BPA and other legacy hydro. As other generation becomes a larger fraction of the total the generation costs will increase and so the final power bill will increase as well.
I live in Port Townsend, WA and I pay ~0.115/ kW but that includes a 0.015/kW green power premium. That rate includes all taxes, and $6 grid fee. I only use ~200-kWh a month during the summer so that $6.00 fee alone adds ~ 0.03/ kWh to my base. The less power one uses the higher that $6 translated to my kWh cost. i.e.. if I used one kWh per month my cost would be ~$6.068 /kWh, where as if I used 600-kWh my cost would only be ~0.078/kWh. Just another way low consumers get penalized.
@Leif:
I was gonna brag on my 315 kWhr (includes pumped well water) for last month. Good thing I didn’t.
Maybe investigating how rate structures are developed in the various states and getting some input from the utility customers to change them in a favorable way, could make a difference in how Americans use electricity. We can maintain our present day standard of living and use far less electricity.
I’d like to see the first 200 kWhr be charged $.08 and the price per kWhr go up two cents for each additional 200 kWhr with no limit. Low usage customers would have a tiny rate and high use customers could pay through the roof. What’s not American about that?
Efficiency is the enemy of consumerism. But nobody bothered to tell us.
Why not take the next step and say that lower power rates in the US overall encourage waste of power and discourage in the long run the implementation of newer cleaner power sources, in particular renewables?
I’ve termed this the “Cheap Energy Contract” which is a hindrance to the type of rate engineering you seem to favor.
http://greenthoughts.us/2008/01/14/the-renewable-electron-economy-xii-the-“cheap-energy-contract”…bedrock-or-dinosaur/
Trying to finesse a political confrontation with the “Cheap Energy Contract” has in the past gone nowhere…. I believe it needs to be taken on in a transparent and direct manner:
“Do you want clean energy, energy innovation, and energy independence? We will have to all pay for it with higher energy prices (as well as tax funded infrastructure build-out)…”