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June 11, 2015

Efficiency moderates effects of higher electricity prices under proposed Clean Power Plan

graph of residential electricity prices and expenditures, as explained in the article text
Source: U.S. Energy Information Administration, Analysis of the Impacts of the Clean Power Plan

Republished June 11, 2015, 9:30 a.m. to clarify expected electricity generation differences in certain regions.

EIA's recently released analysis of the Environmental Protection Agency's proposed Clean Power Plan (CPP) rule finds that electricity prices are expected to rise. However, efficiency and price-induced conservation moderate the projected increase in consumer electricity bills.

Implementation of the proposed rule causes electricity prices to increase compared with prices projected in Reference case (baseline) as new generating capacity is built and operated and as investments are made to improve the operating efficiency of existing electric generators. As coal-fired generators are retired, the increased use of natural gas for generation leads to higher natural gas fuel prices.

Demand-side energy efficiency (EE) is another compliance option for emissions reductions under the proposed plan. Electric utilities and government programs can create incentives for consumers to make EE improvements and lower their electricity use by purchasing more efficient lighting and appliances or by installing higher quality insulation or windows. EIA's analysis assumes that programs are administered by utilities and that the incremental costs borne by utilities to operate residential and commercial EE programs are passed on to customers as part of the distribution services portion of their electricity bill.

The price increases resulting from the proposed rule are highest in the initial years of compliance when dispatch is switched from coal-fired to natural gas-fired generation. Electricity prices in cases that implement the proposal continue to remain above those in corresponding baseline cases in the later years of the projection, as cost recovery of new generating assets—which in the Base Policy case are mostly renewable technologies—and EE improvements over time partially offset reductions in fuel expenses.

The South and Southwest experience the greatest increase in electricity prices under the CPP Base Policy case. Prices in these regions are as much as 15% higher in some years under the Base Policy case than in the baseline case that does not apply the proposal. The combination of higher demand growth and decreasing emissions rates in these regions means more generation will be shifted to renewable and natural gas-fired generators compared with many other regions in the country. In the Northeast and Pacific regions, where electricity demand is expected to rise relatively slowly or even decrease throughout the forecast period, electricity prices are similar to or lower than in the baseline.

Regional differences also occur in the levels of EE savings, as some regions have been adopting EE measures for several years, and thus may have less potential for future energy efficiency. By 2040, demand reductions range from 3.7% in the Rocky Mountain and Southwest regions to 0.8% in New England in the Base Policy case (relative to the Reference case) in EIA's analysis of the proposal.

Demand can be reduced either through energy efficiency, which provides the same level of service output (cooling, lighting, refrigeration, etc.) using less energy, or through conservation, which reduces both energy inputs and service outputs (for example, running an air conditioner less often). In all regions, efficiency improvements and conservation measures as a result of higher electricity prices under the CPP Base Policy case decrease the demand for electricity compared with the Reference case.

Because customers are using less electricity in the CPP Base Policy case, electricity expenditures do not increase as much as electricity prices. In the early part of the compliance period (2020-25), residential electricity prices are roughly 6% above prices in the baseline case, while annual household electricity bills increase by about 4%, or about $62. Household electricity bills approach baseline levels in the later years of the projection as EE savings continue.

graph of residential and commercial sector electricity sales, as explained in the article text
Source: U.S. Energy Information Administration, Analysis of the Impacts of the Clean Power Plan

Principal contributor: EIA Staff