Electricity prices to rise despite oil and gas plunge

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Despite plunging oil and gas prices, retail electricity prices in the U.S. are likely to continue to rise, according to a new report by Deutsche Bank Market Research.

The study found that retail electricity prices in the U.S. have increased at 2-3% nominal rate over the long term and the trend is likely to continue in the near term, providing support to residential solar PPA rates.

Natural gas prices have declined some 36% over the last two years and oil was down approximately 55% at the end of 2015, yet electricity pricing increased about 3% over the same period, according to the study.

Data from the U.S. Energy Information Administration (EIA), which suggests a moderate increase in retail electricity prices, provides support for solar PPA rates in a significantly lower commodity price environment, the report found. Researchers acknowledged that a potential lag effect from commodity declines could slow historical 3.3% price growth rates, but report “minimal evidence thus far.” Furthermore, while long-term low gas prices would inevitably slow electric price increases over time, fuel price declines cannot offset other capital investments, particularly in transmission and distribution (T&D), according to the study.

Indeed, fixed grid investment costs and retail price setting dynamics continue to drive prices higher across much of the U.S. According to the report, in 2013 and 2014, retail prices increased in 80% and 92% of states, respectively. Recent data suggests a slight slowdown in the rate of increase – only about 75% of states showed year-on-year increases in 2015. Yet researchers do not expect significant downward shifts in retail electricity pricing due to continued fixed grid investment, which is projected to increase substantially.

“Large regulated utilities like Duke Energy have recently talked about growth capex shifting from 20% T&D and grid modernization to 40%+ in the 2019-2020 timeframe,” the report said.

Over the past two years, electricity prices have gone up 3% nationwide while natural gas and oil fell 36% and 55%, respectively.

European data from the past several years has largely reinforced Deutsche Bank Market Research’s findings that electricity prices are more likely to increase than decrease while gas has generally showed the same trend.

As illustrated below, long-term electricity prices in the U.S. have increased at a 3%+ CAGR.