Why Are Electricity Prices Rising?

Probably not for the reasons that you think

Few daily necessities have become more expensive recently than electricity. The average American’s bill is likely to be anywhere from 8% to 26% higher this year than it was in 2022.

In New Jersey, electricity prices rose 22% in the last year alone. Rising bills are now seen as a top election issue in the state’s upcoming governors race. “Electricity is the new eggs,” one consumer advocate told the New York Times recently.

Everyone has a take on why electricity bills are rising. Trump’s Energy Secretary Chris Wright argued this summer that solar and wind subsidies were to blame. Fossil fuel lobbyist Alex Epstein recently argued that electrification mandates are the main cause. Some progressive groups, like More Perfect Union, point the finger at data centers.

But look at the data and most of these arguments quickly fall apart.

If solar and wind were to blame for high prices, you’d expect states with the highest renewable energy penetration rates like Iowa and South Dakota to have the highest bills. Instead, they have some of the cheapest. There’s basically no correlation between renewable penetration and electricity prices.

For most Americans, the proliferation of data centers don’t explain their high utility bills either¹. Not yet at least.

The state with the highest electricity price increase last year was Maine. There are virtually no data centers in the state—and certainly none of the gigascale projects that have the potential to distort rates significantly.

If big tech and their data centers were to blame, you’d expect states like Nebraska and Iowa—where Google is building its largest cluster of data centers—to have some of the fastest growing rates. But inflation-adjusted rates were negative in both states.

In North Dakota, crypto and AI companies have driven some of the fastest electricity demand growth in the country. You’d expect the state to have seen the fastest growth in utility bills. But again, intuition would fail you. North Dakota is the only state in the US that didn’t see its electricity prices rise between 2019 and 2024. Over that period, rates actually fell in inflation-adjusted terms.

Most of our intuitions and political biases on this topic draw us to the wrong conclusions for a simple reason: electricity ratemaking is complicated. The fact that rates are set by hundreds of different utilities and regulated by 50 different state regulatory commissions doesn’t make things any easier.

This month, researchers at Lawrence Berkeley National Laboratory (LBNL) published a report that attempts to clear up some confusion on the topic.

So what did these researchers find? Surging electricity prices are like Tolstoy’s unhappy families, each unhappy for their own reasons. There isn’t a single cause of high electricity bills. And most of the popular arguments you read about on social media and in the news are misleading or not true.

Here are some takeaways from the report:

• Extreme weather is driving some of the largest cost increases—especially on America’s coasts.

• The rising cost of “poles and wires” are behind rate increases in most states.

• The natural gas price spikes that followed Russia’s invasion of Ukraine are still costing Americans a lot on their utility bills.

• Rooftop solar programs probably added some costs in some states. (But this claim is likely to be refuted by distributed energy advocates and is a part of a larger long-running debate).

• Rising demand from electricity (e.g. from data centers) was associated with lower costs, not higher costs as many people might assume. But this relationship isn’t guaranteed to exist in the future.

Extreme weather is driving big cost increases

One of the largest causes of recent price increases comes from extreme weather and natural disasters, which have been made worse by climate change. Utilities across the country are rebuilding their grids due to recent disasters and in anticipation of future ones. And they’re passing the costs on through bills.

In Maine storm recovery costs rose from 0.1 cent per kilowatt hour (kWh) in 2020 to 1.8 cents per kWh in 2024. This year, they’ll be 3.2 cents per kWh. Or to put it another way, Mainers are paying 32 times more for storm damages this year than they were just five years ago.

Utilities across the Southeastern US are passing similar price increases on due to Hurricane Helene, which was one of the most expensive natural disasters in US history.

On the other side of the country, utility bills are rising as result of wildfire mitigation. Over the last decade, downed transmission lines have caused multiple wildfires across the West Coast. In some cases they’ve literally bankrupted utilities, like California’s PG&E. Now utilities are trying to prevent future fires by doing things like sticking their transmission and distribution lines underground where they can’t light trees on fire.

In California this has come at an enormous cost. PG&E customers are paying 7 cents per kWh for wildfire mitigation alone. That’s equivalent to about half the cost of electricity in many states—all going to prevent future wildfire risk.