Retail electricity prices closely tracked inflation over the last 10 years

In-brief analysis

September 11, 2024

The change in average residential electricity prices across the United States has generally mirrored the rate of inflation over the past decade, increasing by less than 1% in inflation-adjusted terms between 2013 and 2023. Without adjusting for inflation, the average retail price of electricity for the residential sector increased from a little more than 12 cents per kilowatthour (kWh) in 2013 to 16 cents per kWh in 2023.

Most states regulate residential electricity markets through public utilities commissions. Some states have deregulated electricity markets that allow customers to choose among competitive suppliers to provide their electricity. Even in states with deregulated markets, charges to cover distribution and transmission costs (which make up nearly 40% of electric bills, on average) are recovered through rate regulation.

Utility rate making is a complex process but generally involves a regulated electric utility establishing a revenue requirement to maintain operations and cover the cost of required capital improvements. The proposed rates must then be approved by a public utilities commission. When filing rate increase requests, regulated electric utilities often cite, and public utilities commissions often evaluate, cost increases against increases in the Consumer Price Index (CPI) as one potential justification for increasing revenue requirements. Once approved (the timing of which ranges from automatic increases to years-long approval processes), these rate increases are reflected in the revenue data we collect and publish. The submission and approval of these rate increases (and the lags associated with their approval) is a key difference between the market structure for retail electricity prices and other markets such as gasoline or wholesale natural gas.

Other potential causes for increasing rates come from growing investment in transmission or distribution, higher costs for investment in new generation technologies, or rapid changes in underlying commodity prices. Conversely, growing demand for electricity can have the opposite effect (in the absence of the need for significant, costly investment) as the revenue required is spread over more sales, which can reduce rates in real terms.

Over the past 10 years, electricity price increases in most states fell within a few percentage points of the inflation rate, although this difference can vary significantly in some states.

Prices tended to rise fastest in most of New England and in California, where real prices over the past decade increased by more than 2% on an annualized basis. Prices fell in the midcontinent, with the biggest drops in real prices occurring in Utah and Nebraska.

California's real electricity price rose from a little over 21 cents per kWh in 2013 to almost 30 cents per kWh in 2023, an annual average increase of 2.8%. Higher costs and declining sales tended to increase average residential costs over this period. Costs included investments in grid modernization and renewable energy sources as well as increased operational and maintenance costs from wildfires and other natural disasters. California's Renewable Portfolio Standard (RPS) mandates that a high percentage of energy must come from renewable sources such as solar and wind.

New England's real electricity price rose from a little more than 21 cents per kWh in 2013 to the highest U.S. regional price of almost 29 cents per kWh in 2023, an annual average increase of 2.6%. The higher costs of natural gas and fuel oil starting in 2022 (major feedstock fuels for electricity generation in New England) were significant factors influencing the trend. New England has higher transportation costs for fuels due to competition for limited pipeline infrastructure into the region. In states that have deregulated their electricity markets (allowing consumers to select the energy portion of their electricity service) like most of New England (except Vermont), higher fuel prices directly contributed to the region's elevated electricity retail prices. States in New England also have significant investment in RPS programs.

Over the past decade, the largest annualized real electricity price declines occurred in Utah (2.1%) and Nebraska (2.0%). Access to diverse and abundant local energy resources, including coal, natural gas, wind, and solar, helped keep price increases low despite growing demand for electricity. These states also benefit from well-developed transmission networks, excess capacity that can serve growing demand without the need for significant new investment, and relatively low population densities that limit the need for distribution upgrades.

Principal contributors: Alex Gorski, M. Tyson Brown

Tags: electricity, prices, New England, California, states, map

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