Electricity rate increases have been the focus of much discussion over the past several years. They are currently a specific focus of discussions regarding the current political catchphrase: “affordability”.

There are numerous factors which cause or contribute to electricity rate increases. At the national level the primary factor is inflation in the general economy, which affects utility and merchant generator operating costs, including employee wages and benefits as well as replacement parts and support services costs. Much of the inflation over the past several years has been driven by federal spending to support the energy transition toward Net Zero by 2050. This spending has been reduced over the past year, with a resulting decrease in the rate of inflation.

On the state level, much of the increase has been driven by renewable energy mandates with particularly aggressive schedules. This issue has been particularly significant in California and New York, both of which have legislated aggressive transition schedules. The governments of both states have now begun to realize that their aggressive schedules are economically damaging and practically unachievable. It is not yet clear how either state government will resolve the issue.

At the regional level the issue becomes more complex, as illustrated by the recent focus on the PJM capacity auction which produced record forward capacity charges. The factors at play in PJM include member state Renewable Performance Standards (RPS) and Clean Energy Standards (CES), the Regional Greenhouse Gas Initiative and forced closures of coal generating stations.

The PJM Regional Transmission Organization (RTO) includes utility franchise areas in the following states: Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. Virginia had previously been an RGGI member and is expected to rejoin in 2026. The states shown in bold above are members of the Regional Greenhouse Gas Initiative (RGGI). RGGI operates a Cap & Trade program with a declining annual emissions cap. The cost of emissions allowances purchased through the RGGI auction increases electricity rates in the RGGI states within PJM.

The organizing purpose of the RGGI is to accelerate the transition of the electric generation infrastructure in their states to renewable generation. The cap & trade program essentially forces the retirement of fossil generation assets, primarily coal because of its higher emissions rates.

The pressures at the federal, state and regional levels to accelerate the transition to renewable generation result in increasing investment in redundant generating capacity which displaces a portion of the output on existing fossil generation facilities but cannot replace that capacity. Reduced generation output requires that the capital costs of the fossil generation facilities be recovered through higher costs per unit of generator output, leading to higher capacity charges and ultimately to higher rates.

Most US RTOs and ISOs are capacity constrained. The addition of renewable generation can provide additional electricity output when they are operating, but cannot be relied upon to be available when needed. Expanding reliable generating capacity with renewable generation would require the installation of storage capacity equal to approximately 25% of the annual renewable generator output. Storage capacity is currently several times more expensive than generating capacity, which would lead to even greater electricity rate increases.