Why are electricity prices increasing so much, and so quickly? I decided to look at trends in wholesale electricity prices: the price that utilities or other load-serving entities (LSEs) pay for electricity. Looking at wholesale prices won’t tell us what’s happening with consumer electricity prices directly, since those prices include additional costs like insurance or building more distribution infrastructure. But wholesale prices can let us see trends in the costs of generating and transmitting bulk electricity. Are wholesale prices rising, and part of the explanation for why consumer electricity prices are up? Or are wholesale prices flat, suggesting the cause of rising electricity prices has more to do with other costs to utilities?
Conclusion
At a high level, trends in wholesale electricity prices seem to mostly match trends we see in consumer prices. Until 2020, wholesale prices were flat or declining; since 2020, they’ve risen substantially, faster than consumer electricity prices. And in most places, transmission capacity appears to be an increasing bottleneck: we’re having a harder and harder time accessing the least expensive power. Probing the specific relationship between wholesale electricity and consumer electricity prices would be complex, and beyond the scope of this essay, but it seems likely to me that rising wholesale prices are a major factor. (Though interestingly, the region that has seen the lowest increase in wholesale prices, California, has seen some of the highest increases in consumer prices.)
For my essay on whether we can afford large-scale solar PV deployment, several folks (correctly) noted that it ignored transmission constraints, which are often crucial, and thus gives an incomplete picture of what large-scale solar PV deployment will cost in practice. It doesn’t matter how cheaply your solar PV electricity is if you can’t get the power to where it needs to be. It’s not amazingly clear to me how binding transmission constraints will end up being as battery deployment continues to expand, but we’re certainly currently seeing transmission constraints being increasingly important.
