Power Biz 101

The Costs To Generate Electricity Are Rising.
As discussed in Section Two, electric companies use a variety of fuels to generate electricity. Rising fuel costs significantly affect the price of electricity—for both electric companies and consumers. On an industry–wide basis, fuel and purchased power costs account for approximately 95 percent of the cost increases experienced by electric companies between 2002 and 2005. The increases in fuel costs were unprecedented by historical standards, affecting every major electric industry fuel source.[8]

Natural gas experienced a more than 100-percent increase in spot prices between 2003 and 2005 and a more than 300-percent increase since 1999. The price of oil-based fuels delivered to electric generators rose about 50 percent between 2003 and 2005. (While fuel oil is used to generate only 3 percent of electricity nationally, there are regions of the country that rely more heavily on oil for electricity.) Oil prices also have a significant impact on other fuels, and have driven up the costs of mining and shipping coal.

Average coal prices to electric companies increased 20 percent from 2003 to 2005. In some cases, coal prices rose much more. Finally, the price of uranium, the primary component of nuclear fuel, increased by about 40 percent between 2001 and 2005.[9]

Electric companies take steps to help shield customers from these rising fuel costs. For example, they frequently try to mitigate market volatility by “hedging,” or entering into long-term, fixed contracts at set prices. But not all companies have this option, and such forward contracts cannot cover all of their fuel needs. At some point, customers inevitably will see these rising fuel costs that electric companies must pay reflected in their electric bills.

[8]Ibid, p. 9.
[9]See U.S. Department of Energy, Energy Information Administration’s Web site for historical fuel price data, http://eia.doe.gov/.