Today’s rising electricity prices may be the beginning of significant increases that will last for years, Federal Energy Regulatory Commission staff reported.

The upward pressure stems from two factors—increased fuel costs and higher costs for new construction—and is likely to affect all regions, Charles Whitmore of FERC’s enforcement office told the commission at a mid-June briefing.

The staff report noted that natural gas prices are much higher than just a few years ago and likely will remain so, in light of the increase in gas demand for generation and the global nature of competition for liquefied natural gas.

Meanwhile, coal prices are “increasing and strong,” the report said.
  
The second upward pressure, the increasing cost of construction, “is particularly important because the country is entering a period when we will need to make substantial new investments,” it added. The report cited Cambridge Energy Research Associates as saying the cost of the main inputs into new power plants—iron and steel, cement, copper and other generator metals, and labor—have almost doubled since 2003.

Climate change is also a major issue, with the debate over addressing carbon dioxide emissions affecting how companies think about investments, it added.

Due to the long lead times of coal-based and nuclear plants and the still relatively small contributions of renewables, natural gas will play the “crucial” role in meeting near-term generation needs, FERC said.

Demand response and energy efficiency will also play increased roles.

Responding to the report, Commission Chairman Joseph Kelliher said, “We are actually confronting three realities.” First, he said, FERC and state commissions are regulating in a high-cost environment. Second, the country needs massive investments in generation, transmission and distribution. Finally, climate change is now being addressed in a period of policy uncertainty.

“There is tension among these three realities; they work at cross purposes,” Kelliher added. “If we try to do all three, the result will likely be failure.”

However, he added, the commission can work to assure that wholesale power prices do not rise higher than necessary, to assure electricity supply and meet climate challenges. “The last time we were in a high-cost environment similar to this was the late 1970s and early 1980s,” the chairman said. “Back then, the high-cost environment was the product of traditional rate regulation.”

Competition policy was created as a direct response to the failure of regulation, Kelliher asserted, and it remains the policy “best suited to address the hard realities we are confronting today.”

This article by Todd Cunningham is reprinted with permission from Electric Co-op Today.