The hidden reason why your power bill is so high

If your utility bill confuses you and makes you sweat every month when it demands hundreds of your hard-earned dollars, you’re not alone. The price of electricity is continuing to rise across the United States, and there’s no end in sight. 

Why are our electricity bills getting so expensive? Energy prices have been creeping up across the nation for over a decade. The latest consumer price index saw inflation dip below 3 percent for the first time since 2021, but inflation for electricity prices nationwide remains stubbornly high at 4.9 percent. There’s no single reason why electricity keeps getting more expensive in any one place, however.

The drivers behind rising energy costs are myriad, overlapping, and vexing. Inflation, rising energy demands, volatile natural gas prices, and extreme weather are all contributing factors. The transition to renewable energy is, too. 

Despite what you’re hearing from Republicans, the transition to clean energy is not the driving force behind rising electricity costs, according to a July report from Energy Innovation, a think tank. Building wind, solar, and battery infrastructure is expensive, and connecting those new clean energy resources to the grid is complicated. Rather than making those investments, which save customers money in the long run, many utilities are doubling down on fossil fuel and existing infrastructure in an effort to ensure the grid is reliable. 

For example, PJM, a utility company that serves customers from the mid-Atlantic region to the Great Lakes, recently picked mostly natural gas over renewables at its annual capacity auction, where it buys the electricity it needs to keep the lights on for the year ahead, and its customers will see more big price spikes. 

The United States electric grid is a messy patchwork of thousands of local utilities, many of which are for-profit businesses governed by a complex web of policies and regulations. Throw in those aforementioned variables — inflation, growing energy demand, volatile fuel prices, extreme weather — and you can start to make sense of why your electricity bill won’t stop rising. 

At the same time, there’s good evidence that by updating those regulations and investing more in clean energy, we can meet that demand, confront those challenges, and keep prices down for decades to come. And we’re only going to need more electricity in the future. 

“As [cooking our food] gets electrified, transportation gets electrified, and weather gets more extreme, those demand spikes are becoming larger,” said Paul McDonald, VP of product strategy at Oracle Water and Power, whose team builds AI-powered software that helps shift utility customer behavior towards better energy efficiency.

There’s a lot you can do to make sure you’re using your energy efficiently, even without the help of AI: Even a few degrees on your thermostat makes a big difference, and cranking it up past 72, even past 76 (yes! really) on hot days will save you money and still keep you pretty comfortable. Heat pumps or solar panels, if you can afford the up-front cost, will save you money in the long term. You can also take a closer look at where your energy comes from and play a more assertive role in how you spend your kilowatt hours. 

Before we get into what behavior changes big and small could mean for your out-of-control electric bill, however, it’s helpful to take a deep dive into the numbers on that bill and what’s behind them.

Your electric bill is more complicated than it looks

In recent years, inflation has been the easy explanation for rising energy prices in the US. The cost of electricity has outpaced rising prices for food and the wider consumer price index since early 2021, and there are strong indicators that those prices will keep rising as inflation cools. 

To understand why this is happening, it’s helpful to understand that your electric bill is actually two bills: You’re paying one for supply and the other for delivery.

Electricity supply is the stuff that comes from power plants. Those plants might be powered by coal or natural gas, or by renewables, like wind and solar. The cost of delivery, or transmission and distribution, reflects the many moving parts it takes to get that supply from the power plant to your living room. This includes operating and maintaining the grid as well as any big investments to repair or upgrade the grid by, for example, installing new high-voltage transmission lines that could be used to connect renewable energy sources to the grid.

That said, clean energy is not the culprit when it comes to rising electricity prices, according to the recent report from Energy Innovation. Volatility in natural gas prices, including the huge spikes following Russia’s invasion of Ukraine, has certainly contributed to some price increases on the supply side. But the transmission and distribution costs have actually been going up at twice the rate of inflation nationwide, the report’s author, Brendan Pierpont, told me. 

“That trend of increasing transmission and distribution costs is something that is noticeable all across the country, and so I think it’s an underlying factor in rate increases everywhere,” Pierpont said.

Utility companies have a lot of freedom in setting rates for transmission and distribution — and that directly contributes to how much profit they make. Utilities get to pick what gets upgraded when, and they also have an incentive to spend heavily, thanks to regulations that allow them to collect return on investment, usually around 10 percent, for those expenditures. This is actually built into the price most people pay for electricity.

Here’s how it works: Every year, utility companies ask regulators to approve a “revenue requirement,” which is basically a budget for what the utilities think it will cost to deliver enough electricity to their customers. Those estimates include spending on new equipment but not the cost of repairing old equipment. It also includes that return on investment, or profit, which regulators regularly approve. In Pierpont’s words, “That rate of return has a direct link to the costs that customers pay for electricity.”

What utilities don’t seem to be doing, however, is expanding the grid in a way that would benefit clean energy producers, the Energy Innovation report finds. Investments tend to cover local upgrades, like installing new metering equipment, rather than installing the high-voltage transmission lines that renewable energy sources need to connect to the grid. Meanwhile, consumers are facing more frequent outages that last longer, while utilities keep making more money for installing new, potentially unnecessary equipment.

“It’s like the utilities have a rewards credit card,” said Joel Rosenberg of Rewiring America, a nonprofit focused on electrification. “And they get to keep the rewards for how much they spend, and the [customers] have to pay off the bill, even if that bill takes 80 years to pay off.”

This plays right into the misconception that investment in renewables leads to higher rates.

Many of the states leading the way to clean energy are actually seeing lower energy prices than the rest of the country. Data from the US Energy Information Administration shows that 17 states, including California and Massachusetts, have increased their share of renewable energy sources by more than 20 percent since 2010. And with the exception of California, all of those states have seen the price of residential rate increases rise more slowly than inflation. The higher rates in California can be explained, in part, by rate increases to account for wildfire prevention. In Massachusetts, natural gas is the problem.

States where residents are seeing electricity bills that outpace inflation tend to be the ones with the highest reliance on natural gas, as highlighted in the Energy Innovation report. Some states in New England, including Massachusetts, have depended on natural gas for around 60 percent of electricity generation since 2020 and have seen prices increase by around 10 percent in the same period. Volatility in the price of natural gas also means that some of the highest price spikes are spread out over several years, so there could be more high prices in these states’ futures. 

And none of this takes into account the effects of extreme weather. Hurricane season is just now approaching its peak, after Hurricane Debby already dumped rivers of rain on the southeast US, and La Niña, which brings colder and stormier conditions in the north, is forecast to emerge in the fall. Thanks to climate change, extreme weather events are compounding and getting even more extreme. That’s taking a toll on the grid, and somebody has to pay.

The Biden administration, for its part, has taken several steps toward making the grid more resilient without raising prices. It’s spent over $10 billion on grid resilience and innovation, while also providing local utilities with guidance on how to invest in the grid in the near term without passing costs along to customers. This week, the Department of Energy also released a plan to use clean energy to power data centers, which account for a large share of growing energy demand.

Policy typically takes time to change the lives of everyday Americans, who might feel powerless when confronted with the rising cost of electricity. This tension has fueled the rise of energy cooperatives, where customers have a say in how the grid gets upgraded and how prices are set. If that’s an option where you live, it’s worth a look. Otherwise, you can look inside your home to save money on your next electric bill.

When all else fails, use less electricity

On any given day, there’s not a lot you can do to control how utility companies set the price for electricity transmission and distribution. If you live in a state with a deregulated energy market, like New York, you might be able to choose where your energy supply comes from. You can also decide to lessen your reliance on the grid by installing solar panels on your roof or participating in a community solar project. Otherwise, you can just choose to control your electricity usage.

You’ve probably already heard about some easy tricks to bring down your power bill. You can set your thermostat higher in the summer or install a smart thermostat. You can run big appliances like dishwashers and dryers at night, when energy might be cheaper. You can turn down your hot water heater, which comes with the benefit of hundreds of dollars in potential savings as well as not being scalded by your shower. 

The harder problem is planning for a future in which electricity costs continue to rise. In order to prepare for that — and it is somewhat inevitable, if only because you’ll use more electricity as more of your life becomes electrified — there are a few steps to consider. The first is to do an energy audit and make a plan from there.

“Making a plan is a really important thing,” Rosenberg told me, “particularly because when these big appliances fail, it becomes an emergency replacement situation, whether it’s your water heater or your air conditioner or your furnace,” said Rosenberg, pointing me to Rewiring America’s guide to electrifying everything in your home. If your furnace fails in the middle of winter, you might be inclined to pay for the quickest fix, rather than the most efficient or cost-effective.

If any of those three big appliances break, by the way, you should get in the heat pump game. Integrating heat pumps both for heating and cooling as well as hot water can save the average homeowner over $1,000 a year. 

Buying a heat pump doesn’t mean you have to rip out your furnace, either. You can install micro heat pumps, some of which look like window unit ACs, to supplement your existing system during all seasons. Micro heat pumps don’t yet qualify for rebates under the Inflation Reduction Act (IRA), so it’s worth considering a regular heat pump. Installing a heat pump air conditioner/heater or heat pump water heater lets you claim a $2,000 tax credit in any single year. The IRA offers an additional $1,200 for other energy-saving improvements, like new insulation. 

That’s up to $3,200 of free government money every year, so if you want to install a heat pump this year and get free money and then install another one next year and get free money, the US government welcomes that ambition. (For a handy guide to the IRA’s consumer incentives, check out Canary Media’s cheat sheet, and you can check your state’s rebate offers at the Department of Energy’s website.) 

The list of tips for saving electricity in the long and short term goes on, and the Energy Star website is a great resource if you’re interested in learning about them. If your life is even more electrified — if you drive an EV or have solar panels installed, for instance — there are even more opportunities for savings. Many of these efforts require a significant upfront investment, though. Reaching out to your local leaders to see what can be done to connect more low-cost renewable energy sources to the grid, well, that’s free.