Why Are Electricity Bills Rising?

Many of us are probably feeling like our electricity bills are soaring. It turns out that the way electricity is traded in the U.S. isn’t working properly, and it’s certainly affecting our finances. Even if you’ve never really considered how power gets to your home, let’s take a moment to break it down in a way that makes sense.

Organizations like PJM provide electricity to around 67 million people across 13 eastern states, along with another 46 million in 15 Midwestern states. This includes energy from power plants, whether they’re gas, nuclear, wind, or solar.

But here’s the deal: they also decide how much to pay those energy producers, and the system isn’t exactly fair.

These grid managers operate on a method called “pay-as-clear,” or sometimes referred to as “take and pay.” Imagine you’re hiring a painter for your home. Numerous painters submit bids, and you might pick the lowest one. Then, bizarrely, you end up paying for the highest bid instead. That’s kind of what’s happening to our electricity costs.

All chosen power plants get the highest accepted bids, regardless of how much lower others are willing to sell their electricity for. If someone bids an outrageous price, it’s similar to overpaying for a service. Consider peaker plants, which typically run under 2,000 hours a year and charge sky-high rates. And without enough wind and solar, the reliance on these peaker plants becomes problematic.

This system is pushing electricity costs higher. In 2024, PJM costs are projected to escalate from $28.92 per megawatt per day to $269.92, racking up a staggering total of $14.7 billion. Why? There are three main culprits: increased demand from data centers like those owned by Microsoft and Google, intermittent contributions from wind and solar, and the closure of dependable coal and gas plants.

These closures often result from regulations and the increasing reliance on wind and solar energy, which are backed by taxpayer subsidies. They tend to bid low to win the contracts, even though they’re not consistently reliable. Wind only generates energy about 32% of the time, while solar does so about 20% of the time. We still need coal, gas, and nuclear energy to have a steady supply of electricity.

The issue becomes clear—you can’t rely on wind and sun during critical times, like heat waves or winter storms. These unreliable sources push out dependable plants simply by bidding lower. Consequently, the plants selling less energy must charge more to cover their costs.

Fuel expenses make up around 25% to 40% of production costs, while fixed costs like capital, maintenance, and labor account for 60% to 75%. When energy sales decrease, prices rise. This sets the stage for some of the highest electricity bills ever, exacerbated by the growing addition of wind and solar power.

Countries like Germany, Denmark, and the UK show us that having a substantial reliance on wind and solar can lead to prices that are more than double the national average. The more reliance on intermittent energy sources, the higher the costs rise. It’s a worsening cycle.

Additionally, wind and solar aren’t as “green” as they’re often portrayed. The construction of wind turbines and solar panels relies on coal-powered steel and diesel-powered mining. Plus, when the weather doesn’t cooperate, gas plants need to step in as backups.

Describing coal and natural gas as mere backups for wind and solar is misleading. It’s akin to calling a pitcher a backup if they can only play when conditions are just right. This language is useful for those promoting wind and solar but often obscures the truth.

A better alternative exists: the “pay-as-bid” system. In this scenario, all power plants would be compensated based on their actual bids, not just the highest quote. Think of it as paying each painter what they offer, rather than opting for the most expensive one. This approach would compel wind and solar to compete more effectively.

If they’re too costly, they won’t be selected, which is how competition works. Experts believe that adopting this system could save electricity customers hundreds of billions of dollars while enhancing reliability.

Of course, some utilities might attempt to manipulate the system by bidding high, but competition along with regulatory measures is there to keep them in check. Unlike the current situation, where they profit while your bills skyrocket.

The growing demand for subsidies related to solar energy is only adding to our expenses. It’s crucial for grid managers and the Federal Energy Regulatory Commission (FERC) to move away from this flawed system.

The pay-as-bid method emphasizes affordability and reliability, ensuring that we maintain power without harming our finances. Ultimately, we deserve a power system that truly works for us.