Why Electricity Bills Go Up and Down: Putting Costs in Context

April 13, 2016 | 12:28 pm
John Rogers
Energy Campaign Analytic Lead

While many of us probably have a sense that our electricity bills go up and our electricity bills go down, it may take diving into the numbers to get a sense of just how much that actually happens. In that regard, two graphs in our recent analysis on the future of electricity in Massachusetts seems particularly worthy of extra attention. As with our electricity system in general, it turns out, when it comes to electricity bills, the only constant is change.

What changes

While electricity rates are often the focus of people’s attention (and ire), rates are just a piece of the picture. Two main components go into determining our electricity bills: rates ($ per kilowatt-hour) and usage (kilowatt-hours). Focusing just on rates doesn’t take into account the power of investments in energy efficiency, for example.

In Massachusetts’s case, that would be an important and lamentable oversight. The state’s focus on energy efficiency has been really strong, and the state has been ranked #1 on efficiency for each of the past five years. That’s part of the reason why, when it comes to how much electricity the average household uses, Massachusetts homes beat their counterparts in 42 other states (and pay less each month than 30 of those), including many other states with similar climates.

For bills, then, variations from year to year can come from either piece of the equation—the rate or the quantity—or both. Usage can go up because of an unusually hot summer or cold winter, or go down in mild years. Rates can change because of changes in the price of a dominant fuel.

For Massachusetts and a too-high number of other states, that dominant fuel is natural gas, and there’s a strong linkage between natural gas prices and wholesale electricity rates in New England (see Figure 2).

Depending strongly on one particular fuel can mean that, when that fuel's prices jump up and down, you might just have to go along for the ride (Source: ISO-NE).

Depending strongly on one particular fuel can mean that, when that fuel’s prices jump up and down, you might just have to go along for the ride, at least for the near term (Source: ISO-NE, in UCS, Massachusetts’s electricity future).

Costs in context

The variations in electricity bills that come from rates and quantities suggest that it’s really useful to look at any projected changes in costs—from a set of policies that might have other benefits—in context.

For the recent Union of Concerned Scientists (UCS) analysis on Massachusetts’s electricity future, that’s just what we did. The suite of electricity policies we examined included long-term contracts for hydro/wind/solar, strong incentives for offshore wind, and an overall increase in demand for renewables—altogether, enough to get the state to the point of getting more than half of its electricity from renewables.

And that set of policies looked like a good bet to produce a broad range of benefits: less natural gas use in the electricity sector, lower power sector carbon emissions, lower prices for natural gas for other uses (like home heating), improved public health, more clean energy jobs/stronger economic development… With the offshore wind piece in particular, Massachusetts has a chance to launch a whole new sector with the state at its center.

The cost piece is important, too. Even with assumptions that were decidedly conservative in some ways (on projections of technology cost reductions, for example), though, the extra costs of that full suite of policies for the average household in 2030 worked out to around $3 per month.

There are at least a couple of ways of looking at that dollar figure. One is as a percentage of what we Massachusetts households spend now. That’s in the neighborhood of $120/month on average, so that $3 turns out to be around 2.5% of that average bill.

Bills go up, and bills go down. We can accept it, or we can do something about it. (Source: UCS, Massachusetts's electricity future)

In Massachusetts, as elsewhere, bills go up, and bills go down. We can accept it, or we can do something about it (Source: UCS, Massachusetts’s electricity future).

Another way to look at it is in the context of those year-on-year price swings. And when you look at those swings, you see changes of $5, $10, or $18 up, $5 or $7 down. In all but three of the last dozen years, those swings were bigger than the $3 we’re talking about.

Understanding the changes we already face makes any small price premium seem a lot more like something we can handle.

And, if that small increase buys us some measure of protection from those very swings, all the better. There are probably other ways—financial, technical—of hedging against those price swings, but how many of them get you anything close to the whole range of economic, environmental, and health benefits that our suite of clean energy policies gets you?

Embracing our clean energy future

Overall, as we say in our recent report:

By embracing a wide range of clean energy technologies, and offering incentives to build them at scale, Massachusetts would lower the risk of large natural gas price fluctuations, significantly cut its global warming CO2 emissions, and generate significant net benefits for public health and the state’s economy.

All that for a really modest extra something on my electricity bill? I could go for that.

Posted in: Energy

Tags: Massachusetts

About the author

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John Rogers is energy campaign analytic lead at the Union of Concerned Scientists with expertise in clean energy technologies and policies and a focus on solar, wind, and natural gas. He co-managed the UCS-led Energy and Water in a Warming World Initiative, a multi-year program aimed at raising awareness of the energy-water connection, particularly in the context of climate change, and motivating and informing effective low-carbon and low-water energy solutions.