Disaggregating Future Retail Electricity Rate Growth

Recent Berkeley Lab research found that modest retail rate increases over the past 10 years were mostly driven by large increases in capital expenditures (CapEx) that were offset in part by substantial wholesale price reductions.  Decision-makers are increasingly concerned about the potential future rate impacts of a number of policies and industry trends that support rapid decarbonization, electrification, and grid modernization. Using historical FERC Form 1 data and the existing literature on policies and industry trends that are likely to affect utility-incurred costs and retail sales, Berkeley Lab researchers developed ranges of forecasted growth rates for cost-related rate drivers (i.e., fuel and purchased power; transmission, distribution, generation, and other categories of both non-fuel operations & maintenance and CapEx) and non-cost related rate drivers (i.e., retail sales, peak demand, and customers). These were then used as inputs to a pro-forma utility financial model (FINDER) that estimated the growth in retail electric rates between 2020 and 2030 for a prototypical vertically-integrated investor-owned utility in the United States. The analysis produced the following results:

1. Assuming average growth rates in all rate drivers, future retail rate growth is driven by sizable increases in all CapEx costs, where fuel and purchased power costs are replaced by generation CapEx as the largest rate component between 2020 and 2030.
2. Growth in sales/peak demand/customers, generation CapEx costs, and fuel and purchased power (FPP) costs, in isolation, produce the most uncertainty in rate growth.  Specifically, a 1% increase in the compound annual growth rate (CAGR) of retail sales, coincident peak demand (CP), and customers (Sales-CP-Cust) results in a 0.88-0.93% decrease in the CAGR of rates, in isolation.  However, a 1% increase in the CAGR of generation CapEx budgets results in a 0.07-0.14% increase in the CAGR of rates, while a 1% increase in the CAGR of FPP costs causes a 0.10-0.14% increase in the CAGR of rates, all else being equal.
3. Taking into account the correlation and variability of the growth in all rate drivers jointly, generation CapEx is expected to be both the largest and most uncertain rate component by 2030 (20-25% share of the retail rate).  Transmission and distribution CapEx, along with fuel and purchased power costs are each expected to comprise between 12% and 17% of retail rates.

A webinar discussing this research recorded on September 23, 2021, can be viewed here.