Why are electricity prices rising so fast?
Over the past quarter century, electricity prices across America have increased by an average of 1.8 percent per year, from $8.38 per kWh in 1994 to $13.01 in 2019. Then in January this year both Entergy and Mississippi Power increased their rates by $7.81 per month and $5.27 per month respectively, affecting over half a million Mississippi residents.
According to Mississippi’s Public Service Commissioner, Brent Bailey, this price hike was due to the volatility of natural gas prices. But blaming rises in the price of natural gas conveniently overlooks the role solar has had in bumping up electricity prices.
Research from the University of Chicago has already established that renewable energy targets in a state pushes up the price of power. California, for example, which has a goal of 100 percent renewable energy by 2045, also has some of the nation’s highest electric prices.
But our state, thankfully, does not have such targets. So how is it possible for renewables in electricity increase prices in Mississippi?
It has a lot to do with the bureaucratic way in which energy prices are set in our state.
In a properly functioning market, a company has an incentive to keep production costs down. Why? Because that way they can set their prices low and still make a margin.
The power industry in our state, as is the cast across much of America, is a near monopoly, not a free market. Entergy, for example, supplies power to 45 counties and 461,000 customers.
Worse, it is a vertically integrated monopoly, meaning that it not only produces the power, but distributes it. It would be a little bit like Kroger also owning the farms and food processing plants used to stock its shelves.
The price that Entergy insists that you pay is not an amount decided by free and fair competition. The price instead is set by government bureaucrats at the Public Service Commission that the energy producers lobby.
Rather than the price being determined by what customers are willing to pay, Mississippi electricity prices are calculated by government and corporate bureaucrats on what is called a cost-plus basis. That is to say, they work out what it costs the companies to produce power, and then add on a margin of around 10 percent (the percentage can fluctuate). This automatically removes the incentive to produce more efficiently.
Why should the producer care if it costs more to generate electricity one way rather than some other, if they can automatically get you and me to pay for it?
This is precisely what happened when $7 billion was spent on the disastrous Kemper County ‘clean coal’ initiative. In 2014, Entergy customers who used 1,000 kWh per month saw a 2.6 percent rise in their utility bills to allow the producer to claw back some of the costs.
The same thing is happening with solar.
We are invited to feel good every time the energy producers announce another solar project. Did they tell you that you would be paying extra for it?
The recently lauded Sunflower County solar project will, it has been estimated, add an additional $1.38 to your bill every month. That’s $16.56 a year, which might not sound like much, but add in the other renewable schemes, as it soon becomes quite a cost.
According to some estimates, the MS Solar, Pearl River Solar, Wildflower, Lowndes County, Delta’s Edge and Cane Creek solar projects alone could add something like $117 to each customer’s annual bill.
The average monthly electricity payment of a Mississippi resident is $131.97/month or $1,583/year. What this means is that solar farms from just the past three years have caused a 7 percent increase in utility payments. And these solar initiatives are not new, they’ve been going on for years. In 2003, one of Entergy’s “clean initiatives” cost ratepayers an additional $2.41 per month.
The point is that electrical costs for Mississippi residents have been steadily increasing for decades.
The way that electricity prices are set in our state – bureaucratic negotiations between government and corporations on a cost-plus basis – more or less guarantees that customers get bad value for money.
Far from encouraging energy producers to keep costs down, if the producers are able to add a 10 percent margin to their cost base, they weirdly have an incentive to increase costs. Why should they care if solar farms are not the cheapest way to power your home? They don’t have to meet the cost of using solar rather than say natural gas.
Cost plus gives producers an incentive to ‘go green.’ But green energy is in reality more expensive that producing power by burning oil, gas and coal. If the Public Service Commission really acted in the consumer interests, they would pass on the cost of renewables to the energy company shareholders.
Douglas Carswell is the president & CEO of the Mississippi Center for Public Policy. This piece originally ran at RealClearPolicy.
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