US power transmission, distribution costs seen outpacing electricity production costs

US utility transmission and distribution costs have been rising faster than electricity production costs over the past decade, with utility spending on power delivery 65% higher in 2020 than in 2010, a trend that could continue as utilities invest in grid modernization.

"Over the past decade, major utilities in the United States have been spending more on delivering electricity to customers and less on producing that electricity," the US Energy Information Administration said in a Nov. 23 research note.

After adjusting for inflation, major US utilities spent 2.6 cents/kWh on electricity delivery in 2010, using 2020 dollars, and spending on delivery was 4.3 cents/kWh in 2020, while utility spending on power production decreased from 6.8 cents/kWh in 2010 to 4.6 cents/kWh in 2020, the EIA said.

In real 2020 dollar terms, utility electricity delivery spending increased every year from 1998 to 2020 as utilities replaced aging equipment, built transmission infrastructure to accommodate new wind and solar power generation, and installed new technologies like smart meters to increase the efficiency, reliability, resilience, and security of the US power grid, the analysts said.

As the energy transition to low- and zero-emissions power generation resources advances, power grid infrastructure costs could increase further with additional grid modernization efforts by utilities.

For example, Duke Energy Indiana said Nov. 24 that it just filed a plan with Indiana state utility regulators to improve the reliability and resilience of its statewide network of power lines and infrastructure as part of a six-year investment that will increase customer bills if approved.

"Our reliability ratings are good, but we need to prepare the electric grid for what's to come, including electric vehicles and more customers generating their own green energy," Duke Energy Indiana president Stan Pinegar said in a statement.

Currently 11% of Duke Energy's Indiana customers are supplied from a circuit with automation, but after the proposed plan is completed, an estimated 65% of customers will be served by automated circuits, Duke Energy said.

If the plan is approved by the Indiana Utility Regulatory Commission, Duke would be required to submit semiannual filings over six years to the commission to review progress and requests to recover the costs of investments made, according to the statement.

Duke Energy estimates its grid improvement strategy, if approved, would increase rates an average of about 1%/year between 2024 and 2029.

Power price uptick

Average US retail electricity prices have declined from nearly 12 cents/kWh in 2010 to a little over 10 cents/kWh in 2020, according to the EIA, but power prices have steadily increased in 2021.

Retail power prices reflect the cost to produce and deliver electricity, the rate of return on investment that regulated utilities are allowed, and profits for unregulated power suppliers.

"In 2021, demand for consumer goods and the energy needed to produce them has been outpacing supply," the EIA said, adding that this difference has contributed to higher prices for fuels used by power generators, especially natural gas.

Monthly spot Henry Hub gas prices averaged $3.24/MMBtu over the past ten years, according to EIA data. Benchmark US gas prices averaged $2.04/MMBtu in 2020 and have risen to an average of $3.81/MMBtu from January to October 2021.

The EIA said the increased cost for fuel, capital, labor, and building materials, as seen in the US Bureau of Labor Statistics' Producer Price Index, is increasing the cost of power production in 2021.

US average electricity prices have been higher every month of this year compared with 2020, when power and gas prices were much lower due to pandemic-related demand erosion, according to EIA's Monthly Electric Power Industry Report.