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U.S. Electricity Rates Spike After Years of Slow Growth

It’s not your imagination – you have been paying more for electricity this year. Driven by large increases in the Northeast, U.S. residential electricity prices took their biggest leap in five years during the first six months of this year, the government said on Tuesday.

The U.S. Energy Information Administration said pinpointing all the factors behind the 3.2 percent increase in the nationwide average residential price of electricity, to 12.3 cents per kilowatt hour, can be difficult in such a big, complex market. However, cascading impacts from the “polar vortex” get a big share of the blame.

The record-breaking cold spell in a large swath of the country drove up demand and prices for natural gas, an increasingly important source of electricity generation. Even more significantly, inadequate gas pipeline capacity in the Northeast left that region especially vulnerable to price spikes; the EIA said that “in the first six months of 2014, the day-ahead wholesale power price in the ISO-New England control area averaged $93 per megawatt/hour” – a whopping 45 percent increase over 2013.

Electricity providers can be limited in their ability to pass increases in their own costs onto consumers, particularly in the short-term. Still, “The evidence that we see is that there is a strong correlation between the movement of the wholesale prices and what happened with the retail prices,” EIA analyst Tyler Hodge said in an interview.

In its report, the EIA broke down average residential prices by nine regions, and New England was far and away the leading force in pushing the national average higher in the first six months of the year, showing an 11.8 percent increase. The Mid-Atlantic region was next at 6.7 percent. The price of electricity rose least in regions in the western Plains and actually fell by 2.5 percent on the West Coast, although the EIA said that excluding a billing anomaly the prices were actually higher in that region, although by just 0.9 percent.

Hodge said that the rise in the price of electricity for the first half of 2014 particularly stands out because price increases have been tame in recent years, at 2 percent or below from 2010 through last year, for those full years. Go back to before the crash, to 2006, and you find U.S. residential electricity price rose 10.3 percent.

“Growth rates have been relatively small compared to what we were often seeing earlier in the last decade,” Hodge said, a consequence at least in part attributable to increased natural gas production. That drove the price of the fuel down to historic lows and led to a big increase in the share of generation from natural gas, from about 16 percent in 2000 to 30 percent in 2012.

While wholesale prices have been the big driver behind higher retail prices this year, the EIA noted that delivery costs are also increasing, “in part because utilities have been spending more on the transmission infrastructure necessary for delivering electricity to customers.”

As for the rest of the year, electricity rates follow a seasonal pattern, hitting a low point in December or January, then rising steadily to a peak around August before declining again. A forecast released last month by the EIA reflects that trend – the agency said it expects the U.S. average residential electricity price to increase 2.8 percent for the full year. The biggest increase will be in New England, the agency said, but at 8.5 percent the full-year rise there won’t be quite as steep as it had been for the first half of the year.