Electricity Pricing Paradigm Shift

As many of you have already heard me say, we are trying to remake an energy industry in ~ 15 years that had taken nearly 150 years to build in the first place.? With this rapid transition, history no longer accurately guides future energy decisions. Mark and Patti Case taught me early in my career not to use blended rates to evaluate capital energy investments.? They regularly give an poor picture of actual dollar savings.? ??

I now say that you probably shouldn’t use current rates (even unbundled) when evaluating future investments.? I don’t believe that utility companies have rate structures that currently reflect the cost to deliver electricity now.? The vast majority definitely don’t have rate structures that reflect the mix of power that customers will see in 5 to 10 years.

California Recent Changes

Let’s use California over the last 4 years as an example. I have randomly grabbed data for CAISO (definitions at end of article) from a random September day in 2020 and 2024. BTW – the source of this data is a really cool website GridStatus.io (https://www.gridstatus.io/live). This data is available in real time and gives an amazing depiction of how electricity is delivered in multiple locations like in CAISO, ERCOT, PJM, and other ISO's.

These first 2 graphs show the dramatic increase in solar and wind from 2020 to 2024. The 2024 graph also shows batteries delivering 20% of the grid's power in the evening vs negligible amounts in 2020.

For the same days, let’s look at the renewable power as a percentage of load. This goes from ~ 45% during peak hours in 2020 to over 100% in 2024. During the night, this jumps from 20% in 2020 to 35%.

Finally, let’s look at the impact on the prices. The real time prices in 2024 remain < $20/MWH (2 cents/kWH) from around 8 am to 6 pm and actually have times that go negative where a customer will actually get paid to use electricity. In 2020, the prices from 8 am to 6 pm were always $20 to $40/MWH. In 2024, the highest prices occur at night.

Current Electric Rate Realities

Now let’s look at current utility pricing. I grabbed electric rates for a Western Utility company. The rate structure below is indicative of rate structures that I have worked with for the last 20 years throughout the West. As you can see, this pricing doesn’t come close to reflecting the hourly pricing seen above for California. Utilities charge significantly more during the peak solar hours.

Why The Difference?

So what are the drivers behind the discrepancy between historical prices and future prices?

1. Solar power costs have dropped by 70% to 90% in the last decade. Nobody had even come close to predicting the scale of these price reductions and the scale of solar deployment. I see forecasts that indicate solar prices will drop by another 60% by 2040.
2. Our historical power mix had been “thermal” based. Power plants that burn fuels don’t turn on and off easily and they are less efficient and more expensive to run at part loads. So electric companies historically had excess capacity at night when loads dropped. They sell this electricity at a low cost to spur demand.
3. I am not a utility rate expert. But I believe that it takes time for a utility to modify its rate structure. They have to first redefine their business models to truly disaggregate costs to align revenue models to cover a whole new cost structure. Then they have to run approvals through the regulators. This process is bound to take time.

Is California an Anomaly or the Canary?

I believe California is the canary. They used regulations to mandate renewables. These mandates accelerated California renewable adoptions. Economics are driving the rest of the country. Market drivers have Texas with more installed renewables than California and Texas is expected to surpass California in installed battery capacity in 2025. Solar is clearly the cheapest source of electricity and will just continue to get cheaper. Expect significantly more solar to get installed throughout the country.

Future Pricing Concepts

Let me now walk through a scenario to demonstrate how future electricity prices may look. This scenario is greatly simplified in that it only considers solar power and short duration batteries vs including on and off-shore wind, long duration storage, geothermal power, nuclear power, etc and long duration storage. It also ignore transmission and distribution. The following are the highlights behind these assumptions:

1. Solar panels in a place like Utah deliver 3 times as much energy daily in June vs December. Therefore, three times as many solar panels have to be installed in December to deliver the same amount of electricity.
2. Solar power delivered to a facility at night requires solar panels plus batteries. For this exercise, I have estimated that 2x the amount of batteries will be required in winter vs summer.
3. Solar has a LCOE of 2.8 cents/kWh. This correlates to solar being installed at around $1/Watt.
4. Battery storage has a LCOS of 13 cents/kWh. This correlates to a battery being installed for $500/kWh, being cycled 350 times/year, at 75% loading.

Conclusion

The graph above shows that current rate structures deviate dramatically from future expectations. Renewable power creates great opportunities and risks. Electric users that can adapt to intermittent power sources can significantly reduce their electric rates. However, if they fail to plan appropriately, their costs could increase dramatically.

Electricity users need to focus on flexibility for the future. When and where you purchase electricity will become the driving factor on controlling your energy costs. I covered “when” above by showing that using electricity when the sun is shining will be much cheaper than today’s electricity prices. "Where" comes into play in a couple of manners.

1. Installing on-site solar means you don’t have to deal with transmissions costs and grid constraints. Going off-site entails paying for transmission and dealing with market dynamics in a grid constrained region.
2. Owners with flexibility (like data centers) can modify operations so that heavy energy using operations always occur in locations with available solar power (or wind if plentiful).

Definitions

• Levelized Cost of Energy (LCOE) is the average cost of electricity (cents/kWh) over the life of the solar panels (20 to 30 years) including all project costs (panels, inverters, installation costs, operating costs, financing costs)
• Levelized Cost of Storage (LCOS) is the average cost of storage (cents/kWh) including all the same costs as LCOE but also incorporate the battery round trip efficiency and assumes a battery life of 10 to 15 years.
• California Independent System Operator (CAISO) – non-profit overseeing the operation of California’s bulk electric power system
• Locational Marginal Pricing (LMP) - the price of electricity at a specific location and time, and is calculated every five minutes.