Electric bills are likely to keep climbing, Dallas Fed economist says (2024)

The cost of natural gas has fallen sharply since August, and electricity prices have declined from their late-summer peak.

But power prices remain high in Texas and may well climb higher over the winter, according to an economist from the Federal Reserve Bank of Dallas.

Many residential customers have not felt the impact yet because in Texas’ deregulated power market, they’re still covered by older contracts with lower rates. As those contracts end, residents and businesses must choose new offers, which usually cost more.

“Current prices do not yet fully reflect recent increases in natural gas costs, and the prices Texans pay for power may increase further,” Jesse Thompson, senior business economist at the Dallas Fed wrote in a recent report.

Texas’ average electric prices, adjusted for inflation, have been lower than the nation’s since 2010, and they remained lower last year. But statewide prices climbed at a faster clip in 2022, Thompson said, and several factors are expected to keep the pressure on this year and beyond.

While a generally mild winter has reduced current demand for natural gas, more of Texas’ inventory will be heading to export markets where returns are higher. Texas regulators also are taking steps to boost reliability on the grid, including increasing reserves “substantially” to head off rolling blackouts.

“While this strategy can lower the risk of outages, consumers must now pay for it,” Thompson wrote.

This month, the average rate of a residential plan on the state’s Power to Choose website was 15.1 cents per kilowatt hour, according to data compiled by the Association of Electric Companies of Texas. That’s down from 19.92 cents in August but still significantly higher than the pre-pandemic average of 11.19 cents.

High inflation has been driving up the cost of most items, especially related to energy. In Dallas-Fort Worth, the Consumer Price Index for electricity rose 20.2% in the 12 months ended in November, according to the U.S. Bureau of Labor Statistics. That compared with an increase of 13.7% for the average U.S. city.

Higher natural gas prices are a main reason for higher electric bills, and Texas is more dependent on the fuel. Natural gas provided 44% of the state’s power last year compared with 37% nationally, Thompson said, and higher fuel prices can be passed along more quickly in Texas’ deregulated market.

Exports of liquefied natural gas are expected to grow sharply, he said, because the Freeport facility will be coming back online after a summer fire and three additional projects along the Gulf Coast are under construction.

“Those exports are likely to keep pressuring higher the amount Texans will pay for heat and power through the winter,” Thompson wrote.

Other factors are expected to drive up electric rates. The brutal winter storm of 2021 caused huge losses at power companies, and they’re beginning to recoup those costs.

The Texas Public Utility Commission also proposes redesigning the electric market so Texas can attract more natural gas plants; gas plants can be switched on if weather conditions reduce generation from wind and solar power, and that’s expected to improve reliability.

But it could be an expensive option, especially as more U.S. natural gas is exported and prices become more linked to global markets, said Joshua Rhodes, a research scientist and energy expert at the University of Texas at Austin.

“Maybe we do need more natural gas plants, but we also need to make sure we’re looking at this with clear eyes: That natural gas might not be cheap anymore,” Rhodes said. “So is that really the solution we want to force?”

Wind and solar generated a combined 29% of Texas’ electricity production in the 12 months ended in August — about double the combined share for the nation, Thompson said.

Consumers saved billions of dollars from renewables on ERCOT, the grid that provides most of the state’s electric load, according to research from IdeaSmiths LLC, an energy analysis firm founded by Rhodes. Wind and solar don’t have fuel costs, so they can generate much cheaper electricity, and as the cost of natural gas rises, the savings grow.

Renewables lowered wholesale electricity prices on ERCOT by $7.4 billion in the first eight months of 2022, the study estimated.

“This result indicates that renewables in ERCOT can provide a price hedge against the volatility of natural gas prices,” Rhodes wrote in the study.

ERCOT has many renewable energy projects in the pipeline, including storage batteries that could provide power when wind and solar cannot. Renewables help protect against price spikes and supply shocks in fossil fuels, said Alison Silverstein, an energy consultant who formerly worked with the Federal Energy Regulatory Commission and Public Utility Commission of Texas.

“That’s why it’s so valuable to have wind and solar in the ERCOT supply portfolio,” Silverstein said.

She fears that electricity rates are headed higher for several reasons beyond the cost of natural gas: uncertainties over the redesign of Texas’ power market; ERCOT’s problems with forecasting electric loads for extreme weather; aging gas and coal plants that break down more often; and the consolidation of retail electric providers.

Higher electric bills take a bigger toll on low-income families because more of their limited income goes to energy and housing costs, Silverstein said: “As these extreme weather conditions drive usage and energy bills higher, they will exacerbate energy poverty and housing insecurity.”

In her view, the most effective way to protect the grid is to boost energy efficiency for Texas homes and businesses — although regulators have not focused on that approach.

Energy efficiency “will reduce our demand,” Silverstein said. “If we have fewer spikes in demand, we won’t need as many spikes in supply, and that will also stabilize prices.”