With energy prices rapidly rising globally, customers are feeling the hit at the gas pump and in their electric bills. Higher prices reflect a range of factors, from the warmer temperatures at the start of summer driving up power demand to the continued economic recovery from the pandemic shutdowns and the impacts of sanctions against Russia, which have driven up energy prices. These factors show the importance of making sound policy decisions that ensure reliability and promote investment in a diversity of generation fuels, without falling back on costly mandates or subsidies for specific resources.
The short-term rise in prices from April to May this year is as expected on the one hand, a result of a dual increase in fuel prices and demand as we transition from spring to summer. For example, PJM Interconnection saw a 9.4 percent increase in demand, and wholesale power prices in May jumped 40 percent from April. However, while the seasonal price increase from spring to summer is routine, this year’s rapid surge in costs is being supercharged by constrained domestic natural gas production and increased demand for U.S. LNG exports overseas, driving fuel prices higher than forecasted. Unfortunately, like the rising temperatures, these prices are unlikely to cool down as the summer season continues to set in.
Some argue that PJM prices have increased over the long run, e.g., in May, prices were 188 percent higher than they were one year ago. While these are unquestionably large percentage increases, they are being measured against historically low power prices and demand in 2020 and 2021 due to the COVID-19 pandemic. Even more, pre-pandemic energy prices reached historic lows across restructured market because of an abundance of cheap natural gas driven by the shale revolution, as well as significant cost reductions for a growing amount of renewables like solar and wind. Keeping the recent price surge in perspective is essential to understanding the broader situation around increased electricity costs.
Importantly, the increase in energy prices is not exclusive to competitive markets like PJM. Increased energy and electricity costs are also impacting non-competitive markets (i.e., vertically integrated utility territories) around the country. All models of energy generation are impacted by the recent global surge in costs. The increase in energy costs will be passed on to the consumers, though operators in competitive markets are incentivized to absorb these consumer impacts as much as possible, resulting in savings for the consumer.
A competitive market model is required to ensure reliable and affordable energy for customers, while also transitioning to a cleaner electricity sector. Competitive markets, which protect consumers by shifting risk to suppliers and their investors, have proven capable of delivering on all three priorities – reliability, affordability, and sustainability – since their creation.
We know reliability is a top priority for 97 percent of consumers, but policymakers and regulators have not addressed the issues and policies that are jeopardizing reliability. As demonstrated in the recent report by the North American Electric Reliability Corporation (NERC), we are facing widespread reliability challenges across the West and Midwest that could result in power blackouts this summer. NERC points to higher temperatures driving demand up and reduced power capacity challenging power suppliers’ ability to meet that demand as the main factors that could threaten reliable power supplies.
To ensure a reliable power supply for customers throughout the summer, resources must be available and capable of delivering electricity during extreme weather. Unfortunately, two electricity systems are being developed in the U.S.: one that fulfills state and federal policy preferences by leveraging zero-emissions resources, and another that addresses reliability but is being treated as a backup system even though it ensures customers are served through natural gas and nuclear (and even coal) resources.
Providing customers with the power they need will be largely dependent on the performance of resources being deployed in the coming years. Without the deployment of utility-scale battery storage and the continued utilization of low emissions natural gas fired generation, overreliance on intermittent resources like solar and wind will likely result in reliability challenges. We need only look to California to see this situation in real time. This means that, until complementary solutions to intermittent resources are available, regulators and power suppliers will need to continue to ensure we utilize the fuels and technologies that have provided the U.S. with the electric reliability customers need.