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Publish Date: August 12th, 2024
You’re not alone if you feel like your electricity costs are constantly on the rise. While some customers can attribute higher energy bills to changes in consumption – like adding an EV or hot tub, others keep seeing higher bills without those changes.
So, what’s the deal?
Electricity costs vary widely based on several factors – and we’ll break those down in this blog. But it’s utilities that have a lot of control over the rates they charge. And utilities have been consistently raising their rates. It’s so consistent that to account for this, we include a yearly electricity rate escalator of 4% as a conservative estimate when we model a homeowner’s long-term savings in our quotes.
At Namaste Solar, we’ve seen solar be the remedy to increasing electricity costs for the thousands of homeowners we’ve installed for. With solar, you take control over your electricity, own your power, lock in fixed rates, and lower your environmental footprint.
So, let’s look at what electricity costs are and why they keep going up.
The Energy Bill Hamster Wheel: Increasing Electricity Rates
The truth of the matter is that electricity rates are rising. They’re doing so steadily. And they have been for decades. According to the U.S. Energy Information Administration, the average U.S. residential electricity price rose 6.2% from 2022 to 2023.
Seeing this consistent, fast growth can be alarming. Most utilities will cite inflation, infrastructure costs, or more demand as the culprit for rising prices. And it’s likely that those factors play a part. However, some utilities are for-profit entities – the higher the rates, the more money they make.
And it’s not unheard of for utilities to suddenly introduce new programs or raise the rates in ways that are unfavorable to the consumer. With time-of-use billing, most customers saw their bills increase. And though you can opt out of time-of-use billing, that option is buried in most utility paperwork.
Take another glance at that chart from above. The national average for electricity rates in 1999 was about $.08 cents per kWh. This summer, the cheapest you can get electricity from Xcel in Colorado is at $.12/kWh and on-peak rates are a whopping $.32/kWh.
When it comes to electricity rates, there are very few options for the consumer. You’re left paying what utilities charge, and that amount is steadily increasing year over year. As a solar installer, we of course advocate for generating your own power with a home or commercial solar system, which can reduce your reliance on the utility for electricity. More on that after we learn how electricity rates are determined.
How Electricity Rates are Determined
In most cases, through a regulated process, utility companies set the rates that we pay. They are generally pricing electricity based on the cost to build, finance, maintain, and operate power plants and the grid. In other words, rising costs are more about infrastructure than increased consumption. Other factors include the cost of fuel and the increase in extreme weather events.
Some for-profit utility companies also include an added cost to create added financial returns for their owners and shareholders. The Wall Street Journal cites Xcel’s Gross Profit Margin in 2023 as an enormous 23.07%. And in 2022, Xcel Energy collected $727 million in profit in Colorado.
Utilities don’t work the same way most other businesses do, and it is complex due to the different regulatory structures of large Investor Owned Utilities (IOUs), Municipally owned “Munis,” and Co-Operatives (Co-Ops). Most businesses participate in free competition. Meaning that companies can create goods and services and sell them at rates they’ve decided. Those that succeed grow and those that fail go out of business. The competition in the market is what keeps companies – and prices – in check.
Utilities are not subject to the same free competition. Instead, they’re granted a state-authorized monopoly over a set of customers in a geographic area. To prevent utilities from abusing this monopoly, state regulators closely control and monitor the utility.
In Colorado, this comes in the form of city councils for Munis, an elected board for Co-Ops, or the Public Utilities Commission (PUC) for large IOUs like Xcel Energy. The Colorado PUC consists of three commissioners who are appointed by the governor and confirmed by the senate.
The largest cost increases are usually justified by investments in distribution equipment, also called infrastructure. This equipment is needed to meet the maximum 15-minute electrical demand the utility experiences in the entire year, called ”peak demand.” Unfortunately, utilities are compensated the most to increase the size and capacity of the grid and they are allowed to pass these costs along to the ratepayers. There are no “natural” incentives to optimize the grid or curb growth.
To get the full 101 on utilities and regulation structures, check out this article.
Solar + Battery Storage as a Solution
Look again at that electricity price chart above. If you could have locked in electricity rates in 1999, would you have? If so, you’d be paying 4 times less for on-peak power than today’s Xcel customers in Colorado.
And with solar, you lock in fixed electricity rates the day you go solar and get to enjoy that discounted rate for 25+ years. Think of it like buying in bulk.
Buying a solar system is a way to purchase a bulk amount of electricity while owning your power generation. Depending on how you pay, it can be a higher up-front investment than your monthly electric bill. But when you factor in a fixed rate for electricity, rather than increasing rates, over the 25+ lifespan of the system, you’re saving money. For most customers, they end up consuming clean, green electricity that’s free for them halfway through the system’s life.
According to the U.S. Energy Information Administration, the cost of generating electricity is the largest component in the price of electricity. With home solar, you’re participating in what’s called distributed generation. And therefore, taking the biggest price out of the equation.
And the environmental benefits are massive. In fact, analysis has revealed that individual and household actions have the potential to reduce roughly 25-30% of the total emissions needed to avoid dangerous climate change.
In addition to the cost savings and reductions in emissions, solar when paired with battery storage can help reduce peak demand, which can have a hand in curbing related increases in electrical rates. Since utility rate increases are often driven by increased cost of infrastructure and consumption, reducing consumption – especially during peak periods – has the potential to lower costs for everyone.
Utilities of the future will likely incorporate solar with battery storage on homes, electric vehicles and smart appliances that will help optimize our utility infrastructure, increase reliability and lower costs for everyone.
Hop Off the Hamster Wheel, Once and For All
If you’ve been considering solar, now is most definitely the time to get your free quote. There’s no end to increasing electricity costs in sight. Utility providers will continue to raise rates to meet infrastructure and generation demands as well as grow profits. All while the grid becomes increasingly unstable due to extreme weather events.
We’ve got a team of non-commissioned experts who will give you straight-forward advice without the sales pitch so you can make the best decision for your home. If solar makes sense for your goals, we’ll be the first to tell you. And if not, we’ll likely be the only company to tell you that, too. Click the button below to get started. It might just be your ticket off the never-ending increasing electricity rates hamster wheel.
