2021 has come to a close. After another pandemic year combined with severe weather events, energy companies and other experts look at overall electricity trends. One conclusion from the U.S. Energy Information Administration is that wholesale electricity rates skewed higher in 2021 than in previous years. What factors contributed to the increased energy rates, and is this upward trend expected to continue into 2022?
Wholesale electricity works like any retail market. Electric companies purchase electricity from wholesale suppliers. The utility then adjusts its consumer rates accordingly in response to changes in the wholesale price. The pandemic played a major factor in 2020 prices, which led to noticeable spikes the following year; while the U.S. recorded low electricity demand during the peak of the pandemic, the economy started to bounce back following the vaccination rollout in 2021. Accordingly, the EIA reported summertime price hikes as Americans returned to the office.
Major weather events
Energy stakeholders witnessed the largest price jumps in February 2021, with energy hubs around the country reporting sharp increases in response to unexpectedly cold weather. The largest jump occurred in the Electric Reliability Council of Texas (ERCOT)’s regional market. Unseasonable winter weather in Texas devastated the Texas electric grid, leaving many without clean drinking water and heat. Unsurprisingly, the limited supply due to failed infrastructure and increased demand from consumers shot wholesale electricity prices through the roof, costing utility companies $1,485/MWh. To offer some perspective, ERCOT’s wholesale price in February 2020 was closer to $20/MWh. This significant event impacted the year’s wholesale electricity average.
Reliance on natural gas
Besides the alarming winter weather events, fuel costs are a major contributor to the increased wholesale electricity price. Since 2020, the United States has overwhelmingly transitioned to natural gas as its main source of electricity generation, making up 40% of the country’s power supply. Natural gas is more environmentally-friendly than other fossil fuels, releasing half as much carbon dioxide as coal. As the U.S. set climate change goals and imposed new environmental regulations in recent years, the country’s reliance on natural gas grew. Natural gas prices began increasing marginally in 2020, and experts noticed a dramatic hike in the latter half of 2021.
Supply and demand
Electricity prices are increasing around the world and the United States is somewhat insulated from the high energy costs (in large part because the U.S. has fossil fuel reserves and generates its own electricity). Even so, supply is decreasing, especially in the natural gas market. As economies return to post-pandemic levels and people adjust to unseasonably cold winters, the power demand is increasing. Basic economics dictates that the wholesale price inevitably increases in response, as seen throughout 2021.
As the country’s economy recovers from the ongoing consequences of the pandemic, one should expect energy prices to stabilize. However, unpredictable weather and increased demand for fuel around the world are still significant burdens on the wholesale electricity industry. Natural gas prices will likely remain high in 2022, especially with colder-than-average January temperatures across the country and ongoing demand for natural gas around the world. Take time to research and compare electricity rates as they continue to adjust amidst the various factors.