While much has been written about high energy inflation for oil and gasoline over the last three years, little has been written about the material inflation in U.S. power prices.
In most power regions of the country, more power plant capacity, measured in megawatts, is being decommissioned than is being built, including in regions such as New England, New York, and the PJM Interconnection region, which covers the mid-Atlantic and some Midwest states. In effect, we are de-electrifying in large areas of the country.
And while most of the power plants we are shutting down have been coal or nuclear, which can run at their maximum rated capacity more than 90% of the year, the wind and solar power plants that are being added run at about 35% capacity factors because they only generate when the wind blows or when it is sunny. These dynamics are a double hit to power supply.
As a result of this net shrinking of power capacity, wholesale power prices are rising significantly. Wholesale power prices in these regions are up about 100% over the last three years. Last week, the auction for next year’s “capacity prices” for power in the PJM Interconnection region jumped by 933% above the prices customers are paying this year. That is stunning inflation.
Capacity prices are a component of most U.S. regions’ power bills. It is a payment to reserve the right to call on a power plant to deliver power, and it is part of a customer's overall power bill. In the auction that took place for PJM last week, the utilities and other retail power providers reacted to the shrinking availability of power plants in the mid-Atlantic, compared that to significantly growing power demand, and decided to increase their bids for the capacity of those power plants by 933% over prices they are paying this year. This increase in capacity prices will lead to additional material power price inflation for customers in those states next year.
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The availability of power plants has been shrinking due to environmental regulations being placed on older, primarily coal plants. Not enough power plants are being built to cover for those shutdowns due to federal and local restrictions on new construction. And given most new power plants have been wind and solar, they do not qualify to participate to provide “capacity” since they do not have the capability to be available on demand 24 hours every day.
This material power price inflation is accelerating across the country. For those looking at electrification of the U.S economy, this is a challenge. Early shutdowns of more power plants will accelerate this inflation. The power markets need the construction of all-the-above types of power plants, especially ones that have the ability to dispatch on demand.
Paul Dabbar served as undersecretary of energy for science from 2017 to 2021.
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