William Pentland has a very interesting post over at Forbes Energy in which he notes that average nationwide retail electricity prices increased from 2013-2015, and also that the Energy Information Administration expects rates to continue to rise in 2016. If the EIA is correct, then electric rates in 2016 would have increased about 4.5 percent over the 2013 average. As Pentland explains, this trend doesn’t make much sense at first impression, in light of historically low natural gas prices and plummeting oil prices.
According to Pentland, increasing demand is unlikely to be the cause of rising electricity rates, due to the simple fact that “many if not most utilities are selling less—not more—electricity than they used to sell.” And he also rightly suggests that wholesale electricity rates are unlikely to blame, because these wholesale markets are largely dictated by the price of natural gas, which, again, has been stuck at historical lows. While Pentland identifies recent regional price spikes (due primarily to logistical clogs) as one possible culprit, he expresses uncertainty whether such localized impacts could explain a nationwide trend.
In this fashion, Pentland does not posit a definite explanation for the phenomenon he demonstrates. Rather, he ends his post with a question: What is causing electricity rates to increase, despite unusually low fuel costs and generally declining energy costs?
My guess is that the cause is EPA’s war on coal.
During President Obama’s first term, it quickly became apparent that EPA intended to require all existing coal-fired power plants to retrofit with the most expensive emissions controls, regardless whether or not it made any sense to do so. In practice, this meant requiring coal-fired power plants to install flue gas desulphurization systems (“scrubbers”) and selective catalytic reduction systems (“SCR”). To be sure, the agency was not motivated by public health. Rather, EPA’s goal was to require these retrofits, regardless whether or not they made any sense from a public health standpoint, in order to make coal fired electricity less competitive. (The cost of advanced post-combustion controls like scrubbers and SCR is roughly $200 million per boiler; most coal-fired power plants have multiple boilers). To be clear, the EPA’s agenda in imposing these policies was to get “beyond coal.”
During Obama’s first term, EPA pursued this unwritten policy primarily through the implementation of two ridiculous regulations:
- The first is the Mercury and Air Toxics Standards (aka, the Utility MACT). This regulation would require scrubbers at all existing coal fired power plants, at a cost of about $10 billion annually. The purpose of this absurd rule is to protect to supposed population of pregnant subsistence fisherwomen who, during their pregnancies, consume hundreds of pounds of self-caught fish from exclusively the most polluted bodies of fresh inland water.
- The second ridiculous regulation is the Regional Haze program. EPA employed this rule mainly to require the installation of SCR and other NOx controls at coal-fired power plants west of the Mississippi River. The purpose of the Regional Haze is to improve the view at national parks, and yet, despite imposing billions of dollars in compliance costs, EPA’s Regional Haze regulations would have an imperceptible effect on visibility. The “benefits” are literally invisible. (See for yourself here).
Again, these nonsensical rules took effect in the President’s first term, during a time period from 2011-2012.* Due to the highly regulated nature of retail electricity markets, it takes a few years for utilities to start recovering regulatory compliance costs. As such, there’s a significant lag between when a regulation goes final, and when ratepayers start paying for it.
The upshot is that regulations imposed in 2011 and 2012 wouldn’t start affecting power prices until 2013-2016, which comports with what we’re seeing. However, just because the timing’s right, doesn’t mean my thesis is right. Rather, it’s speculation at this point.
However, if I’m right, then it’s a troubling sign of what’s to come were Obama to get his druthers. The President’s second term EPA priorities are even more costly (but just as groundless) as his first term priorities.
*Regional Haze is implemented on a state by state basis, over an indefinitely long period (until air is pristine), so it remains a problem. That said, EPA most aggressively employed the Regional Haze in the 2011-2012 period.