Why Falling Natural Gas Prices Aren’t Leading to Lower Business Electricity Prices

Although a number of factors go into determining the end price that consumers pay for any product, one baseline factor that plays the biggest role is the cost to obtain or produce goods and services for consumers. In the field of energy, the cost to procure energy sources has a direct correlation to the price that consumers pay. Supply and demand also play a role in setting prices. When supplies of natural gas, for instance, spike upward and demand levels off or falters prices will also fall.

 

However, over the past year there has been a confusing trend in electricity prices for residential in business customers across the U.S. While the cost of natural gas production plummeted throughout 2012 for utility companies, consumers still face ricing electricity prices. Throughout the end of 2012 electricity prices continued to rise despite the falling cost of production.

 

The U.S. power grid relies heavily upon natural gas to produce electricity for various regions across the country. Natural gas accounts for nearly one-third of energy production in the U.S. power grid and while there has been a long trend in falling prices associated with cheaper natural gas, that trend may be coming to an end. Although natural gas is getting cheaper for utilities to access and put into production, 43% cheaper in 2012 than 2011, residential and business consumers may no longer see that reflected on their power bill.

 

At first glance it might have been easy in recent months to point to demand as the cause for rising electricity prices. The summer months of 2012 produced one of the worst droughts in decades and the heat waves accompanying those droughts caused a huge spike in demand as air conditioners across the country were cranked up to combat the heat.

 

If the heat wave during the summer wasn’t bad enough, the winter of 2012/2013 wasn’t much easier on the nation’s power grid. One winter storm after another barreled across the northern United States dumping several feet of snow and plunging temperatures well below zero in many parts of the country.

 

Despite these extreme weather anomalies, analysts say that it wasn’t the demand that caused rising electricity prices for businesses and residences across the country. Despite the rising demand during 2012, natural gas production costs remained low. Analysts pointed to other factors that played a big role in higher residential and business electricity prices.

 

For starters, the pricing schemes used by regulators in several states mean that price fluctuations are very slow in trickling down to consumers. Regulators will set pricing plans years in advance, in some cases, meaning that as prices rise and fall the consumers do not feel the effects immediately. On the one hand, this insulates customers from sharp spikes when productions costs or high demand drive prices up. But on the other, it means that customers don’t feel the relief when production costs fall.

 

Also, while the cost of producing electricity and procuring natural gas has fallen in recent years, the cost of transmitting that electricity to consumers has been rising fast. Upwards of 40% of the average residential or business electricity bill consists of costs associated with receiving electricity from the power grid. With the cost of transmitting electricity rising faster than the price of producing it, consumers are not seeing lower bills in the end.

 

Though it may seem annoying to consumers, analysts have pointed out that the investment by utilities in the transmission of electricity is overdue. In recent years the national power grid has come under scrutiny for being less than reliable, and blackouts in major metropolitan areas like New York City have highlighted a fragile system.

 

Utility companies across the country are rushing to install new transmission lines, install new equipment, and upgrade power plants that have suffered from years of under investment. After nearly two decades of falling prices, consumers might be in for an uptick in electricity in the coming years as companies move to upgrade their equipment and plants to deliver more reliable streams of power.

 

There are other factors that play a role in whether or not consumers see drastic price changes; or if they see any changes at all. While regulators control the cost of supplying power to residences and businesses, utility companies in different regions of the country experience different markets for natural gas itself.

 

Certain parts of the country allow for an open, competitive market when it comes to energy. Consumers are allowed to shop around for the cheapest electricity rates available, meaning utility companies are dealing with plummeting wholesale prices. Other regions of the country, however, have more tightly controlled markets that insulate the utilities from price swings and pass the buck onto consumers.

 

In the end, perhaps the biggest problem is the bloated role that natural gas plays in U.S. electricity prices. Sources such as coal (38%) still contribute a big chunk to electricity production in the U.S., but it is often natural gas that plays the biggest role in determining electricity prices. Despite increased natural gas production in recent years, and larger supplies after a warm winter in 2011, electricity prices are likely to continue trending upward.

 

For the time being, residential and business electricity consumers are going to have to deal with rising prices, even as production costs decrease. Until utilities have completed upgrades to delivery and production systems, the average bill is likely to remain higher for consumers. In the long run, prices may continue rising unless a more diverse power supply is put into use.

 

There has been a push in recent years to allow further development of clean coal technologies to take advantage of America’s vast coal reserves. A power grid that relies upon a combination of sources, clean coal, natural gas, and renewables such as wind and solar power, provides a more stable marketplace for utilities and consumers alike.

 

A stable, reliable power grid with more affordable electricity prices for businesses can play a role in getting the economy moving in the right direction again. When businesses aren’t overburdened by operating costs, there is more money to hire new employees and invest in future growth that benefits the economy as whole.

Sam Jones is the author of this article. When asked how to find the latest information on an immersion heater he advises Green Energy at uSwitch.com as being a leading resource.