Why are Electric Costs Increasing?

Electricity Prices: Reduced Sales and Increased Investment

 

The electric utility industry in Indiana is facing steadily increasing costs to generate and deliver electricity to homes, businesses, and industries. While electric utilities make continuous efficiency improvements and are working closely with state regulators to contain electricity prices and to keep electricity prices as low as possible, rising costs are becoming inevitable in Indiana and throughout the country.

For over the last 10-15 years, the average electricity prices for Hoosiers has increased for two primary reasons: sales are flat or decreasing, and investor-owned electric utilities have made significant investments in:

  • construction of new cleaner coal and natural gas power plants;
  • installation of over billions of dollars in pollution control equipment to comply with federal environmental mandates; and
  • upgrades and expansion to the electric grid

 

Electricity Prices for Customers Have Increased Over Last 15+ Years

 

Industrial Rates. According to data from the U.S. Energy Information Administration, which includes data for investor-owned, municipal, and electric cooperative utilities, average industrial electric rates in Indiana were the 11th lowest in the U.S. in 2001 at 4.11¢ per kilowatt hour (kwh). In 2018, Indiana’s average industrial rates were the 29th lowest at 7.16¢ per kwh – a drop of 18 places and a 74% increase. Kentucky (82%) experienced the largest increase in the region. Also, Ohio (57%), Illinois (43%), and Michigan (43%) also experienced increases in their average industrial electric rates larger than the national average (37%).

2001

Rank

State 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 %

Change

2018 Rank
1 KY 3.04 3.09 3.21 3.34 3.6 4.05 4.47 4.82 4.92 5.05 5.33 5.35 5.66 5.68 5.48 5.67 5.72 5.52 82% 6
11 IN 4.11 3.95 3.92 4.13 4.42 4.95 4.89 5.46 5.81 5.87 6.17 6.34 6.7 6.97 6.86 6.97 7.54 7.16 74% 29
15 OH 4.27 4.87 4.79 4.89 5.1 5.61 5.76 6.2 6.72 6.4 6.12 6.24 6.22 6.77 7.02 6.98 6.92 6.7 57% 24
28 IL 4.65 4.89 4.86 4.65 4.61 4.69 6.61 7.34 7.01 6.82 6.42 5.8 5.94 6.85 6.67 6.51 6.47 6.65 43% 23
32 MI 5.08 5.02 4.96 4.92 5.32 6.05 6.47 6.73 6.98 7.08 7.32 7.62 7.72 7.68 7.02 6.91 7.19 7.28 43% 31
  U.S. 5.05 4.88 5.11 5.25 5.73 6.16 6.39 6.96 6.83 6.77 6.82 6.67 6.89 7.1 6.91 6.76 6.88 6.93 37%  

Commercial Rates. In 2001, average commercial electric rates in Indiana were the 3rd lowest in the U.S. at 5.29¢ per kwh. In 2018, Indiana was 30th lowest at 10.36¢ per kwh – a drop of 27 places and a 96% increase. Kentucky (84%) and Michigan (48%) also experienced increases in average rates larger than the national average (35%). Illinois and Ohio only saw an increase of 21% and 17%.

  • Average commercial electric rates ($/kWh)

2001

Rank

State 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 %

Change

2018 Rank
3 IN 5.29 5.98 6.12 6.31 6.57 7.21 7.29 7.82 8.32 8.38 8.77 9.14 9.6 9.96 9.78 10.01 10.54 10.36 96% 30
2 KY 5.2 5.3 5.37 5.6 6.01 6.44 6.76 7.29 7.63 7.88 8.49 8.73 8.56 9.44 9.44 9.57 9.85 9.56 84% 20
35 MI 7.54 7.79 7.55 7.57 7.84 8.51 8.77 9.17 9.24 9.81 10.33 10.93 11.06 10.87 10.55 10.64 11 11.17 48% 39
  U.S. 7.92 7.89 8.03 8.17 8.67 9.46 9.65 10.26 10.16 10.19 10.24 10.09 10.26 10.74 10.64 10.43 10.66 10.66 35%  
32 IL 7.4 7.52 7.3 7.54 7.75 7.95 8.57 9.25 9.04 8.88 8.64 7.99 8.14 9.26 9.02 9.02 9.09 8.95 21% 14
39 OH 8.46 7.81 7.55 7.75 7.93 8.44 8.67 9.23 9.65 9.73 9.63 9.47 9.35 9.83 10.07 9.97 10.05 9.93 17% 25

Residential Rates. In 2001, average residential electric rates in Indiana were the 9th lowest in the U.S. at 6.92¢ per kwh. In 2018, Indiana’s average residential rates were the 15th lowest at 12.02¢ per kwh – a drop of six places and an increase of 74%. Michigan (88%) and Kentucky (87%) experienced larger increases. Ohio (48%) and Illinois (44%) increases were under the national average (50%).

  • Average residential electric rates ($/kWh)

2001

Rank

State 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 %

Change

2018

Rank

15 MI 8.26 8.28 8.35 8.33 8.4 9.77 10.21 10.75 11.6 12.46 13.27 14.13 14.59 14.46 14.42 15.22 15.4 15.56 88% 21
1 KY 5.58 5.65 5.81 6.11 6.57 7.02 7.34 7.94 8.37 8.57 9.2 9.43 9.79 10.16 10.24 10.49 10.85 10.45 87% 6
9 IN 6.92 6.91 7.04 7.3 7.5 8.22 8.26 8.87 9.5 9.56 10.06 10.53 10.99 11.46 11.57 11.79 12.29 12.02 74% 15
  U.S. 8.58 8.44 8.72 8.95 9.45 10.4 10.65 11.26 11.51 11.54 11.72 11.88 12.13 12.52 12.65 12.55 12.89 12.89 50%  
17 OH 8.37 8.24 8.26 8.45 8.51 9.34 9.57 10.06 10.67 11.31 11.42 11.76 12.01 12.5 12.8 12.47 12.63 12.35 48% 17
18 IL 8.71 8.39 8.38 8.37 8.34 8.42 10.12 11.07 11.27 11.52 11.78 11.37 10.63 11.91 12.5 12.54 12.95 12.55 44% 18

Investments in Pollution Controls, New Power Plants, and Transmission & Distribution

The electric utility industry is among the country’s most capital-intensive sectors, with many of its costs stemming directly from investments in and maintenance of the power plants, transmission and distribution lines, equipment, and structures that are used to deliver electricity. Money spent by a utility to provide electricity falls into one of two categories: expenses and capital investments.

 

According to data gathered by the Indiana Department of Environmental Management (IDEM), those investments in pollution controls and cleaner coal technology have resulted in a significant reduction of potentially harmful emissions in Indiana since 2001.

  • Indiana Emissions (2001 – 2018)

Source: Indiana Department of Environmental Management

 

Indiana electric power sector is using more and more natural gas to generate electricity. In fact, natural gas use in Indiana has skyrocketed. Since 2006, natural gas deliveries to electric power sector in Indiana increased over 580 percent – 27,213 million cubic feet (MMcf) in 2006 to 185,155 MMcf in 2018. Why? There has been a significant drop in natural gas prices for electric power generation during that time period. According to the U.S. Energy Information Administration, natural gas prices have dropped over 50% ($7.11 per thousand cubic feet in 2006 versus $3.52 per thousand cubic feet in 2017). The chart below illustrates the significant drop in the price of gas used by electricity generators (regulated utilities and non-regulated power producers) whose line of business is the generation of power.

 

The following chart, which is data gathered from the Indiana Utility Regulatory Commission (IURC), illustrates the significant transition away from coal to natural gas and other sources of fuel since 2008.

  • Indiana Electricity Generation Fuel

Source: IURC Annual Report, 2018

Indiana electric utilities consume 25 million short tons less of coal today than in 2006, which is a 41 percent decrease (60.5 million short tons in 2006 versus 35.6 million in 2017).

In addition to the significant drop in the price of natural gas, one of the other reasons for the decrease in the consumption of coal by electric utilities in Indiana is due to the increase in coal prices. The annual average price of coal at open market in Indiana increased from about $27 per short ton in 2006 to $42 per short ton in 2017 – a 55 percent increase in price.

 

Decrease in Sales of Electricity

Sales of electricity to industrial customers have decreased 6% in Indiana over the last 12 years.

To determine the average electricity price, the basic utility ratemaking formula is:

 

Revenues (costs + CapEx + fair return) ÷ Units Sold (Sales of kwh) = Avg. Electricity Price

 

According to Federal Energy Regulatory Commission (FERC) Form 1 data for the five investor-owned electric utilities in Indiana, overall retail sales of electricity since 2006 decreased over 2% in Indiana (6% decrease in sales from industrial customers) while costs and capital investments, including a fair return, increased 38% (33% allocated to industrial customers).

 

Source: U.S. Energy Information Administration.