Inflation remained red hot last month. Although gasoline prices have fallen, stickier energy prices are still a concern for the economy.
The U.S. Bureau of Labor Statistics reports the consumer price index increased 8.3% in August 2022 from the year-earlier period. That's lower than the peak (so far) from June 2022, primarily because gasoline prices have declined throughout the summer.
Stripping out food and energy categories delivered a core-CPI print of 6.3%, which was higher than June and July figures.
Despite the focus on vehicle fuel in most discussions of energy's impact on inflation, gasoline is only one component of the energy category within the CPI dataset.
Consider the full breakdown, where all estimated year-over-year price changes reflect averages paid by urban consumers.
- The latest inflation data estimate total energy prices increased 23.8% in August 2022. The individual components are weighted differently.
- The energy category is broken down into two components: energy commodities (up 27.1%) and energy services (up 19.8%).
- Energy commodities is broken into fuel oil (up 68.8%) and gasoline (up 25.6%).
- Energy services is broken into electricity (up 15.8%) and piped natural gas (up 33.0%).
Electricity prices may have risen by the smallest amount of all components in the energy category, but increases in recent months have been unusually high relative to historical patterns.
- In the decade before the coronavirus pandemic, electricity prices rarely increased faster than inflation. They exceeded a 3% year-over-year increase only in 2014, according to the labor-statistics bureau.
- Investments in modernizing the nation's power grid haven't hurt urban households. Residential electricity prices actually fell in 2016 and 2018, according to both the BLS and U.S. Energy Information Administration.
- The favorable trend of the past decade is ending abruptly. The EIA expects residential electricity prices to increase 7.5% in 2022 from the prior year. That's nearly double the initial estimate, provided in January, of a 4% increase from 2021.
Consumers are justifiably wondering what's going on. Could it be the record renewable capacity additions in 2021 and 2022? Are all those greedy electric utilities just price gouging? Maybe it has something to do with Russia's invasion of Ukraine?
Natural Gas Is the Culprit
As it turns out, the driving force behind surging electricity prices is natural gas.
A confluence of factors is at play. The most important is that natural gas prices have surged in 2022 due to low production in recent years, record domestic consumption, and record exports of liquefied natural gas.
Consider that the average cost of natural gas used to generate electricity in the U.S. held relatively stable thanks to shale-gas production. In the decade prior to the coronavirus pandemic, average monthly prices exceeded $5 per million BTU in only 12 months, according to the EIA.
Prices have now exceeded that threshold in eight of the past nine months. They're hovering near $8 per million BTU in mid-September, suggesting the trend could persist through the winter.
Rising natural gas prices are being amplified by other factors within the power sector.
- The U.S. relied on natural-gas-fired power plants for 36.1% of total electricity generation in the first half of 2022.
- The U.S. continues to build new natural-gas-fired capacity to partly replace retiring coal-fired power plants. From the beginning of 2020 to June 2022, the nation added 11,800 megawatts of gas-fired capacity and retired 20,600 megawatts of coal-fired capacity.
- The amount of electricity generated from coal-fired power plants fell 6% in the first half of 2022 compared to the year-ago period, whereas electricity from natural-gas-fired power plants increased 6% in that span.
- The U.S. leaned on natural-gas-fired power plants for a record amount of electricity generation during heat waves that suffocated large swaths of the Lower 48 in July 2022.
Don't Blame Renewable Energy
It's common to see arguments that increasing renewable-energy penetration is driving electricity prices higher. So far, that isn't supported by the data.
Consider that Oklahoma, Kansas, and Iowa generate 35%, 43%, and 58% of their total annual electricity from onshore wind power, but have among the lowest retail electricity prices in the country.
For comparison, onshore wind provided 11.6% of the nation's total electricity generation in the first half of 2022.
It's also important to acknowledge that wind and solar farms don't have fuel expenses. The cost of the wind and sun aren't affected by supply chains or geopolitics. The primary cost of renewable energy assets is the capital costs associated with building and financing projects, which is generally fixed.
Electric utilities that wield large renewable-energy portfolios have managed to keep customer bills in check with inflation.
Xcel Energy (XEL) is one of the nation's largest utilities and largest investors in onshore wind farms. It leaned on renewables for 36% of total electricity generation in 2021. As a result, its customers avoided $870 million in fuel expenses last year. In fact, the average monthly bill for the company's residential customers increased only 6% from 2013 to 2021.
So, yes, American households are getting pinched from all angles in the current inflationary environment. That unfortunately and unusually includes electricity prices.
The good news is that rising natural gas prices could fade quickly if production and supply increase, providing relief for electric bills sooner than most other categories in the CPI print.
But perhaps the best way to keep customer bills low in the long run is to invest more, not less, in fuel-free renewables.
