Why is electricity so expensive right now? It’s complicated

Electricity is traded like a commodity.

Getting a simple answer to a simple question —why is electricity suddenly so expensive? — is anything but simple.

The way Ohio electric utilities arrive at the rates they charge customers is complex, to say the least. Auctions, the timing of those auctions and events across the globe conspire to make electric rates unpredictable.

But for the month of June 2022, at least, it appears that AES Ohio’s generation rate, or its “price to compare” with other companies, is the highest in Ohio at 10.91 cents per kilowatt-hour of usage for residential customers.

There are reasons for that, industry observers say.

AES Ohio customers faced higher electric rates after a wholesale electric auction this spring.

Why have “auctions” for electricity? Electricity is a tradeable commodity, like corn or oil. But it can’t be stored in a warehouse like tangible products.

Even so, electric companies are expected to meet demand. They do that with their own generating capacity, or with capacity purchased through market auctions.

“The alternative to auctions like these our utilities conduct is to purchase power in real-time markets, which can be volatile on a day-to-day basis,” said Public Utilities Commission of Ohio (PUCO) spokesman Matt Schilling.

The Federal Energy Regulatory Commission (FERC) this year delayed capacity auctions by PJM, the regional “power pool” overseeing the electric grid of which Ohio is a part, Schilling said.

Such auctions are a major input into the price of electricity.

By the time AES held its wholesale auction April 18, it was nearly two months after Russia had invaded Ukraine. Global energy prices were escalating. The results of the auction, blended with results from earlier auctions, determined rates for June 1, 2022 through May 31, 2023.

“AES just so happened to have its auction scheduled right as global prices started spiking, while the other utilities were a bit earlier in the spring,” Schilling said.

A spokeswoman for AES Ohio called the higher rates resulting from this year’s auction “unavoidable.”

“At the time of the auction, that was where the (price) trajectory was, and it’s unfortunate that was the timing,” said Mary Ann Kabel, director of corporate communication at AES Ohio.

She emphasized that prices resulting from the April auction are in place for one year.

In a statement issued later, AES Ohio said that due to delays in auction scheduling, the utility has been unable to hold longer term, multi-year auctions that protect customers from market spikes.

“The timing of the auction is set by the PUCO and has been the same for the past several years,” the company said. “So, when the regularly-scheduled auction was held, we had to secure generation for all of our standard offer customers for the upcoming year at a time when prices had suddenly and dramatically increased.”

Ken Rose, an economist and senior fellow with the East Lansing, Mich.-based Institute of Public Utilities, said higher natural gas prices are clearly impacting wholesale electric prices.

Electric prices are tied to natural gas because natural gas-fired generation units are often the most expensive sources used to supply power, according to the U.S. Energy Information Administration (EIA).

And the EIA said June 16 that it expects the price of natural gas delivered to electric generators to average $8.81/MMBtu (million British thermal units) this summer, up from $3.93/MMBtu last summer.

Nationally, natural gas comprises 40% of electric generation sources.

More American-produced natural gas will likely head to Europe, where some nations are trying to wean off Russian-produced gas — further tightening natural gas supply and raising prices, Rose said.

“That’s part of the reason for the spike in the natural gas prices,” Rose said.

Another complication: Ohio utilities’ electric rates don’t change at the same pace.

A few years ago, AES proposed to include part of its costs — its renewable portfolio standard compliance costs — into its standard service offer and only update it once a year, after auction costs change in June, Schilling said. That was supposed to make billing simpler.

Other utilities also have renewable portfolio standard compliance costs, but those costs are updated once every three months.

So while other utilities’ costs will change more frequently compared to AES Ohio, far and away the largest part of the “price to compare” is the auction result, Schilling said.

He does not expect prices for other electric companies to vault over AES’s price due to renewable costs alone.

So at least for the month of June 2022 and perhaps for some time beyond, AES Ohio’s rates are higher than anyone else’s in Ohio.

PJM spokesman Jeffrey Shields said PJM has no control over the timing of state auctions.

“We are not the authority on pricing,” Shields said. He added: “It is fair to say that the price of fuel such as natural gas or coal impacts the cost of producing electricity produced with those fuels.”

Are higher electric prices here to stay? Rose says history suggests they’re not permanent, but that doesn’t mean they’ll change any time soon.

“My crystal ball is just as foggy as everyone else’s,” he said. “But if this has happened before, and each time of some duration, the way it looks like right now, natural gas prices could stay high for the rest of this year, maybe well into next year.”

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