U.S. Electricity Prices Continue to Rise on High Gas Prices

By Christian Roselund

On 7 September, the U.S. Department of Energy’s Energy Information Administration (EIA) released its Short-Term Energy Outlook, which forecasts continued increases in electricity prices driven by sustained high gas prices. EIA estimates that electricity prices increased 4.3% in 2021, will rise 7.5% in 2022 to $0.148 per kilowatt-hour, and will increase another 3.3% in 2023.

Underlying this shift is the sustained high price of natural gas, which comprises 37% of U.S. electricity generation and is the marginal fuel in many wholesale markets. Closing prices for front-end natural gas futures prices rose to $8.78 per million British thermal units (MMBtu) in August, an on September 1 were $9.26 per MMBtu. As for spot natural gas prices, EIA expects these to remain above $9/MMBtu throughout the fourth quarter of 2022, but to decline again in 2023 to $6/MMBtu. Natural gas is often supplied to power plants under long-term contracts on prices set well in advance of delivery. This means that electricity prices lag the change in gas prices.

Along with these sustained high electricity prices, EIA expects the portion of U.S. electricity generation from renewables to increase from 21% in 2021 to 22% in 2022 and 24% in 2023. This will be driven by strong wind and solar installations in 2022; however, EIA expects wind installations to fall in 2023. Regardless, the increasing share of wind and solar will continue to eat into the market chare of gas and coal, with both declining from 2022 to 2023.

Source: Short-Term Energy Outlook (U.S. Energy Information Administration)