Why Rising Energy Prices Don't Necessarily Mean Higher Power Bills

The average price an American household paid for a kilowatt-hour of electricity went up significantly last year. But the average monthly electric bill rose only a little. The reasons why are a little complicated.

US residential electricity bills increased by 2% last year, which is roughly in line with the average annual increase over the past decade, according to data from the Energy Information Administration.

That increase isn't nothing. The average monthly electricity bill for residential customers totaled about $137 last year, an increase from $135 in 2022. 

For some, the surprise from that data set comes in its relationship with inflation. Rather than being exacerbated by higher 2023 inflation, electricity bills stayed relatively steady, and even decreased on the EIA's "real bills" calculation, which adjusts for inflation. 

But for those who have watched the market for years, that relationship is no surprise. 

"Utilities and electricity is a regulated market in a lot of areas, so you're not going to see huge fluctuations in prices way outside of what you would see in terms of the cost of living and inflation data," said EIA Industry Economist Alex Gorski. "So it's about what I would expect." 

Why are electricity rates rising faster than bills?

Monthly electric bills are affected by two main factors: electricity prices themselves and the amount of grid-delivered electricity consumed by customers.

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Although residential electric bills didn't skyrocket last year, the actual price of electricity continues to rise. The EIA found that the average US residential electricity price rose 6.4%, from 15.04 cents per kilowatt hour in 2022 to 16 cents/kWh in 2023. 

The consumption of that electricity, however, is going the other direction. 

Average monthly electricity consumption per residential customer dropped from 899 kWh in 2022 to 855 kWh in 2023. That decline alone is enough to offset some of the rising costs of electricity, because less distribution means less cost for utility providers. But even those relationships are a chicken-and-egg issue. 

"With higher prices, it kind of forces consumers to cut back on their consumption compared to when prices are lower," Gorski said.

Why did we use less energy last year than we did in 2022? That's up for debate. But one of the biggest reasons, according to Gorski, is more efficiency in our homes and buildings. 

"Efficiency in houses keeps improving," he said. "So as we get more efficient homes, you have less consumption on average compared to the previous year." 

Energy costs depend on where you live

If your personal experience with electricity bills and inflation doesn't match the national figures, it's probably because of the significant gaps between the underlying numbers behind these national averages. 

Although it's useful to have a perspective on overall energy costs and usage throughout the country, the price of electricity and the cost of electric bills varies drastically depending on where you are in the country. 

That variance comes from a wide variety of factors, from usage and weather to oil prices and energy efficiency.

"You see huge differences," Gorski said. "For instance, Hawaii has quadruple the price per kWh that Louisiana has, but they only use, on average, one third of the electricity per customer that someone in the state of Louisiana would have. So it varies a lot by state." 

Continuing Gorski's example, he said Hawaii has the lowest residential consumption of any state, but it also has the highest percentage of customers with rooftop solar. 

"They kind of don't need utilities to give them electricity when they can create it on their own," he said. 

States and regions even affect the efficiency that Gorski cited as the driver of decreasing demand. In the Northeast, many homes are moving to electric appliances like heat pumps, increasing electricity usage and lowering oil usage. In the South, older, less energy efficient homes require more energy to stay cool in their hot summers, which stresses the grid and increases usage. 

And then, there's the weather. 

"Consumption is very weather-related," Gorski said. "If you have a hotter summer in 2022 than 2023, you will probably have more consumption in the prior year. … Air conditioning is the main driver for consumption. But if you have a really cool winter, there's more electrification in heating than there used to be." 

With winter coming, that means higher heating costs. And electricity is the second biggest source for heating in the US, just behind the fossil fuel natural gas. The EIA's forecast for this winter is for bills to mostly be the same, except where colder temps could drive up heating costs in the Midwest.

Can renewable energy actually decrease electric bills? 

If you're tired of being at the mercy of this ever-changing market fluctuation and elements out of your control, there seems to be an answer in the adoption of renewable energy. 

At the macro level, the math is easy: Renewables are our cheapest form of energy. 

Our electric grid is powered by a variety of methods, from traditional fossil fuels (which make up about 60% of the grid) to wind or solar power. As those renewable methods continue to be adopted, they help keep prices down because they're actually a less expensive way to generate electricity. 

Are they so much less expensive that they could actually send electricity bill prices heading in the other direction? Some experts don't think that's too outlandish. 

"Homeowners have this expectation ingrained that, no matter what happens, utility prices will continue to go up," said Pol Lezcano, a senior associate at BloombergNEF, a strategic research provider covering global commodities. "The reason why that expectation is ingrained is not just because historically prices have been going up, but also because they just don't understand. It's really hard to understand, even for some of us doing this for a living, why electricity prices could go up. So it's quite well understood that rooftop solar serves as some form of protection against those future price hikes." 

For many, the continued increase in adoption of rooftop solar serves as a major hope for the future. The technology is dropping in price and becoming easier than ever to install on your home. That has Lezcano and others bullish on its potential to shape the industry. And in Gorski's calculations, the decrease in consumption that comes from broader adoption of solar does make sense. 

"With rooftop solar and renewables -- especially with rooftop solar plus storage -- as the technology gets better, we will for sure see more customers being more self-reliant and less reliant on utilities," Gorski said. "That plus increased efficiency in residential homes will drop consumption at the residential level." 

On a broader and even more simple level, more access to renewables means more competition. And that's always a good thing for consumers. 

"Renewables offer a residential customer with more variety in a lot of areas, whether they want natural gas or solar or wind energy" Gorski said. "That variety increases competition. Whether you're fossil fuel or renewable, they both want your business."