Budget for Higher Electric Bills

Mounting strains on the electric grid will hit consumers in their wallets but will lead to new business opportunities, too.

Your electricity bills are going to show hefty increases in coming months, even as the reliability of the nation’s electric grid grows shakier.

Capacity constraints loom. Strict new federal clean air rules set to take effect in 2016 will force the shuttering of dozens of coal-fired power plants, which account for a sizable portion of the country’s available power generating capacity.

The shutdowns and scramble to offset closed coal power plants with facilities that rely on natural gas to generate power spell sharp cost increases. Some parts of the country may also experience brief outages, though widespread blackouts aren’t in the cards. Note, too, that utilities face a growing need to shield the electric grid from terrorism, adding to their costs.

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Look for electricity rates to rise about 3% on average this year nationwide, with some regions seeing even steeper hikes. New England will see a 7% jump; the Mid-Atlantic, 4%. Both regions are more reliant on natural gas, and this year’s higher natural gas prices are pinching utilities that burn gas for power.

A steeper gain is on tap for next year: a 4% increase nationwide and, in the coal-reliant Midwest, a jump of 5% or so.

The coming shutdowns of coal-fired power plants worry many electric industry experts. Jim Hunter, director of utilities at the International Brotherhood of Electrical Workers, warns that the U.S. Environmental Protection Agency—which wrote the rules to reduce emissions of nitrogen oxide, sulfur dioxide and other pollutants from power plants—is underestimating the extent of the closures.

Hunter says that not enough new, cleaner power plants will be built to offset them. “I have to believe [electricity] prices are going to go up” to encourage the construction of more plants and keep power demand from overwhelming the reduced generating capacity, he says.

Mike Bryson, executive director of systems operations at PJM—the company that coordinates power delivery in much of the Mid-Atlantic region—says he’s not concerned that lack of electric generation will cause outages for customers.

However, he does expect electric rates to rise and become more volatile as utilities in PJM’s service region shut down coal plants and burn pricier natural gas to generate power. “We still have a sufficient reliability margin” during periods of peak demand, such as this past winter’s severe cold weather, he says. However, keeping the system up and running reliably with less coal-fired power will be costly.

Grid operators in the Midwest—home of many of the coal plants slated to close—are even more cautious in their outlook. J.T. Smith, manager of policy studies for grid operator MISO, says that the Upper Midwest faces particularly stiff challenges in adapting to a low-coal future. The retirement of up to 18% of the region’s coal plants means that MISO is “taking on a little bit of risk” that future power demand could eclipse supply. Brief, localized outages can’t be ruled out, he says.

Meanwhile, utilities are scrambling to protect the electric grid from terrorist attacks, one year after unknown assailants disabled a critical substation in California, nearly causing a sizable blackout. Regulations coming this year from the Federal Energy Regulatory Commission will call for increased surveillance of power stations and transmission lines and require walls and other physical barriers to protect the most critical facilities.

Sue Kelly, president of the American Public Power Association—one of the groups helping to develop the new safety rules—expects that utilities will need to invest heavily in cameras and electronic sensors that can detect intruders, and work closely with local police agencies on developing plans to thwart saboteurs.

Rising electricity prices also create opportunities, especially for large industrial users whose operations are flexible enough to accommodate some brief, voluntary power reductions in exchange for reduced electric rates and cash payments from their utility or grid manager. Such “demand response” programs are going to be called upon heavily in the next few years to smooth out peaks in power demand and avoid unplanned blackouts, particularly in PJM’s Mid-Atlantic service region. Higher utility rates also make it more attractive to generate power independently of the electric grid.

The falling cost of solar power systems, for example, will look more attractive as utilities’ rates rise, speeding up the return on investment for homeowners and firms that go solar. Big solar installers such as SolarCity and Sunrun figure to see a bump in their already fast-growing markets.

Moreover, businesses specializing in surveillance can expect plenty of demand from utilities looking to safeguard their power stations and related infrastructure. Aerial drones from the likes of AeroVironment and Aeryon are good bets to help patrol the nation’s half-million miles of high-voltage power lines, once drones get approved for widespread commercial use in a few years.

Also likely to be in high demand: Sophisticated alarm systems that warn of intruders at far-flung power facilities, such as security firm Optellios’ networks of remote sensors and fiber-optic cables.

Jim Patterson
Managing Editor, The Kiplinger Letter

Jim joined Kiplinger in December 2010, covering energy and commodities markets, autos, environment and sports business for The Kiplinger Letter. He is now the managing editor of The Kiplinger Letter and The Kiplinger Tax Letter. He also frequently appears on radio and podcasts to discuss the outlook for gasoline prices and new car technologies. Prior to joining Kiplinger, he covered federal grant funding and congressional appropriations for Thompson Publishing Group, writing for a range of print and online publications. He holds a BA in history from the University of Rochester.