The Future of Energy Prices

The Future of Energy Prices And How Solar Plays A Key Role

• Updated on November 15, 2022 • [rt_reading_time postfix=”minute”] read

When you’re weighing the pros and cons of investing in solar for your business, it’s important that you take a holistic look at your energy costs and understand your levelized cost of energy. That includes not only understanding the cost of installing a solar and battery storage system for your facility, but also what you’d be paying for electricity in the future if you don’t have solar.

Of course, that begs the question, what will electricity prices look like in the future?

The long term outlook for the cost of electricity is hard to nail down, in part because we don’t really know what the integration of cheaper renewable energy into our power grid will do to rates – and how quickly that impact will be felt. However, we do know that average costs are going up for many customers and we expect this trend to continue as fossil fuel commodity prices go up and carbon regulation comes down from the federal government. While we can expect the growth of renewable electricity to positively impact pricing for most businesses, overall energy costs, including electricity will continue to be a key cost centers in the future.

That said, you don’t really need a crystal ball to know that, like everything else, energy prices are bound to continue their march upwards for at least the next decade. Just take a look at the news and you’ll find plenty of examples of utilities asking their public utility commissions to approve significant rate increases.

In this article, we’ll explore some of the key factors that drive the rise and fall of electricity prices and how a solar system can help manage your future electricity bills.

Electricity Prices: Yesterday and Today

To understand what your future electricity bills might look like, it’s helpful to take a look at recent pricing trends.

The chart below is a snapshot of historical pricing data from the U.S. Energy Information Agency (EIA). These figures are from the South Atlantic region, which includes Florida, Georgia, North Carolina, and a handful of other states in the region.

July 2012July 2015July 2018July 2020July 2021July 2022
Commercial Sector9.429.749.599.019.4211.38
Industrial Sector6.767.287.006.626.939.15

Electricity prices, cents per kilowatt hours
Source: U.S. Energy Information Administration, South Atlantic Region

As you can see, commercial and industrial electricity rates were relatively steady over the past decade, but businesses saw significant increases between 2020 and 2022. This rise in costs can be attributed to two key factors:

  1. the cost of fuel sources like coal and natural gas that generate the majority of grid provided electricity
  2. aging conventional power generation infrastructure, particularly power plants and transmission lines.

In Georgia, for example, we are seeing the impact of challenges related to building large-scale energy infrastructure with the expansion of Plant Vogtle near Augusta, GA. Georgia Power customers have been paying a Nuclear Cost Recovery Fee on their bills for the last six years to offset the construction costs of this project, which is now 3-4 times over budget and still unfinished. Independent analysis has estimated that once complete the cost of electricity from these units will increase customer’s bills by several hundred dollars a year.

EIA data shows that the price per kilowatt hour varies across the country, with some regions paying more or less than businesses in the South Atlantic.

National averages show similar patterns to what we’re seeing in the South Atlantic – including the big jump in 2022.

Electricity Prices: Tomorrow

Looking at the data, you might be tempted to think that 2022 is simply a blip and that electricity prices will soon come back down. Unfortunately, the EIA isn’t quite so optimistic.

There is no relief projected in the near term according to the EIA, at least not for the commercial sector. The agency’s Short Term Energy Outlook pegs average commercial rates across the country at 12.48 cents per kilowatt hour in 2023 (up from 11.27 cents in 2021), while the industrial segment will average 7.96 cents (up from 7.26 cents in 2021).

Residential consumers should expect to see the highest electricity rates in 2023. The EIA predicts households will pay 15.24 cents per kilowatt hour, up from 13.72 cents in 2021.

What drives the cost of energy?

Everything from geopolitical unrest to supply chain disruptions can impact the price of electricity. Here are a few of the factors experts say will play the biggest role in the growth of future energy prices.

Market disruptions

The war in Ukraine has caused natural gas prices to spike around the globe, including here in the US. Thirty-seven percent of the country’s electricity supply is generated by burning natural gas, so as natural gas costs rise, so does the cost of electricity. Experts predict natural gas prices will remain elevated in the coming years. All forms of energy are interconnected so disruption in one area has ripple effects in other areas, making it very difficult for businesses to anticipate where costs might rise.

The world is still struggling with supply chain issues stemming from the pandemic. The utility industry isn’t immune to these challenges and is currently dealing with significant transformer shortages. The raw materials needed in the manufacturing of transformers are in short supply, which leads to supply bottlenecks.

Aging grid infrastructure

The US electricity grid is old. Nearly three quarters of the nation’s power lines and transformers are more than 25 years old – and a good chunk of those components are pushing 50. We’re also still using the same system that Thomas Edison first created in the 1880s. While Edison’s design has served us well for nearly 150 years, experts agree that it’s not up to the demands of a modern, electrified society.

Maintenance and repair

Between the growing number of natural disasters and severe weather events we’re seeing, and keeping our aging electric infrastructure running, utilities are finding themselves making more frequent repairs.

Add to that the rising cost of things like transformers and other components, and the overall cost to maintain and repair the grid is going up.

Upgrading and modernizing the grid

Driven in part by state and federal mandates around the reduction of carbon emissions, utilities are also working to upgrade the grid by integrating more renewable energy sources like wind and solar. California is requiring that half of its energy be sourced from renewables by 2025, and 100% by the year 2045.

While renewable energy will reduce carbon emissions from the energy sector, it does pose a challenge for the current grid, which as designed for constant, steady state power from a large, fixed power plant. Renewable energy is intermittent, meaning power generation varies in intensity during different times of the day and seasons of year. The grid will need to be modernized to enable it to accept these intermittent energy sources.

While the federal government has committed to helping utilities bear some of the grid modernization costs through programs included in the Infrastructure Investment and Jobs Act (IIJA), it’s still expected that electricity rates will climb for utility customers, at least in the short term.

As of 2020, renewable energy is the cheapest energy available, so in the decades to come, when we’ve paid for our fully renewable grid, prices may come back down – but when that happens and by how much requires the aforementioned crystal ball.

Distributing energy closer to load via customer-sited renewable energy projects will create savings for businesses, utilities and the government by preventing some of these costly grid upgrades.

Increased costs lead to increased rates

To cover all of these new and additional costs, many utilities are asking public utility commissions to approve rate hikes. Georgia Power, for example, recently asked for approval of a 12% rate hike for homes and small businesses and a 6% increase for large businesses over the next three years.

Utilities in Indiana, Michigan, and Washington State, are among those also petitioning for increased electricity rates this year.

Supply and demand

Local, state and federal mandates are pressuring utilities, businesses of all sizes, and even general consumers to reduce their consumption of fossil fuels in favor of cleaner greener electricity from renewables. Experts predict this will lead to near term electricity supply and demand issues.

As we’ve seen with the price of consumer goods, if energy demand goes up and supply can’t keep pace, electricity prices will go up.

Electric vehicle adoption

Consider, for example, electric vehicle adoption, which is expected to jump significantly thanks to the tax incentives in the recently passed Inflation Reduction Act. Between businesses and governments electrifying their fleets and a growing number of residents plugging in their new EVs, demand for electricity is going to increase.

Summer Weather

Weather can wreak havoc on the demand for electricity. Demand is typically higher in the summer months as people run their air conditioners to keep cool, and summers are projected to get even hotter over the next decade. As the temperatures rise, so will the need for electricity.

We’ve seen that high demand already this year. ERCOT, the grid management company in Texas, reported that they had broken electricity demand records 11 times as of July.

Winter Weather

The winter months can be just as challenging. You may remember ERCOT from 2021 when the organization garnered national attention for an extended power outage in the wake of Winter Storm Uri. In that case, the supply of natural gas to electricity generation stations was interrupted, and when utilities couldn’t meet customer demand, the grid failed.

The three day outage cost nearly 250 lives and billions of dollars.

How solar can help you mitigate your energy costs

So, in general, it looks like electricity costs will be going up for the foreseeable future. By how much, no one can really say – and yet, you still need to budget for next year’s operating expenses. How can you do that if you can’t accurately predict what one of your biggest expenses will be?

Here’s where we get to the good news. Installing a solar energy system can help you manage your energy costs and make them more predictable.

Understanding the true value of solar

As we mentioned at the top, knowing your levelized cost of energy (LCOE) is key to understanding the real value of solar. This is because when it comes to solar, what you’re really purchasing is a hedge against the future energy costs we’ve been talking about.

Your LCOE compares how much your utility-generated electricity costs are escalating over time as compared to the more fixed capital costs of electricity provided by your solar panels and battery storage system.

LCOE also considers the impact of different financing options, the cost of operating and maintaining your solar system and a variety of other factors.

Because of the complexity of the formula, it’s best to let a reputable solar provider like Velo Solar help you calculate your LCOE.

Solar saves you money

If you have solar panels powering your business, even partially, you’ll reduce operating costs because you won’t have to buy as much energy from the utility in the first place.

This is especially true once you’ve paid for your system – you already own every kilowatt of energy your solar panels produce. That means you can draw on your own power during peak hours when utility rates are higher to not only lower your energy bills but make them more predictable.

A battery energy storage system can provide additional energy cost savings, especially if your operations run 24 hours a day.

Solar incentives provide greater savings

Most businesses purchasing a solar and battery energy storage system are eligible for the Solar Investment Tax Credit, also known as the Solar ITC. The Solar ITC reduces the cost of commercial solar projects by lowering your tax liability with both a tax credit and an accelerated depreciation schedule.

Congress recently passed the Inflation Reduction Act (IRA) which sets the Solar ITC at 30% until 2032 (The rules for residential and commercial projects differ, so you’ll want to work with a reputable commercial solar provider like Velo Solar to ensure your project qualifies and that you maximize your credit).

In addition to the federal investment tax credit, your commercial solar installation may also be eligible for state and local tax credits, as well as incentives offered by your utility – all of which can further reduce your investment costs.

solar panels on the industrial rooftop showing the city on the horizon

The bottom line

Solar systems aren’t just for big businesses any more. Thanks to lower prices and tax incentives, commercial solar is accessible to businesses of all sizes.

By helping you manage your electricity costs today and in the future, solar systems provide businesses with the ability to control their own energy destiny.

Velo Solar: A trusted commercial solar provider

If you’re interested in a commercial solar system, partner with Velo Solar. With our design-build approach, we can create a system specific to your business’ needs, energy goals, and budget.

Velo Solar stands ready to help you save money on your energy bills, improve your resilience, and reduce your carbon emissions.