06/05/2012 03:49 pm ET Updated Aug 05, 2012

Electricity Rates Unlikely to Rise

Energy consumers from Chicago to New Jersey were shocked after headlines proclaimed that the recent PJM energy capacity auction would result in electric bills about $130 a year more than this year's prices. The auction procured 164,561 megawatts of capacity, or $136 per megawatt, three years in advance of the 2015-2016 billing year. (Reserving capacity well in advance is standard practice and the date coincided with a federal deadline to meet new environmental rules on mercury and other air toxins from power plants.) PJM ran the auction for the grids it operates in Pennsylvania, New Jersey, Maryland, Ohio and northern Illinois. Popular reasons journalists gave for the higher auction prices were higher expenses for power plants due to decreased demand and lower natural gas prices, which rival electricity prices. Others claimed that it was regulation driving up the price of electricity.

A week after the auction results, a paper by Dr. Susan Tierney of the Analysis Group put the alarmist caterwauling on notice. Tierney noted that electricity rates are actually projected to drop 10 percent from 2011 levels by 2015 and that, overall, PJM overshot its capacity margin by five percent. Tierney's paper seemed to call into question the theory that the auction would negatively impact electricity rates.

To understand how electricity rates might not rise despite the higher rates from the capacity auction, it is important to note that while PJM reserves energy capacity, other bodies run an energy charge auction separate from the capacity auction. In Illinois, for example, an independent body called the Illinois Power Agency (IPA) runs this auction. These energy charges are prices agreed to in contracts between the utilities like ComEd and Ameren and power plants. The auctions for energy charges used to be run by energy companies themselves, but in Illinois there were allegations of corruption that led Governor Pat Quinn to to create the IPA to run the auctions.

Citizens Utility Board (CUB) spokesman Jim Chilsen noted the current volatility of ComEd prices. "Market prices for electricity are quite low right now. The reason why ComEd rates are so elevated is because ComEd has been locked into some higher than market priced contracts. And the last of those contracts go away in a year, June of 2013." Chilsen even noted that as some contracts expire this month, prices should go down a bit.

Thus, when some claim that the capacity auction is going to lead to higher electricity rates without taking into account other factors, "There is a little bit of comparing apples and oranges going on there," said David Kolata, executive director of CUB. "It looks like a wash overall and possibly a bit of a decline because energy makes more of the bill than capacity."

Another recent development in Illinois power is the lack of funding for renewable energy developments due to municipalities aggregating their electricity bills and switching to alternative suppliers. ComEd and Ameren had depended on a larger base to provide a budget for renewables. To help mitigate this effect, municipalities must pay a renewable fee before switching to another company. "Some of that money has been borrowed by the state," Kolata said. "But certainly the governor is a big supporter of renewable power and I expect that it will be used for that purpose."

The arguments of those concerned about the potential high cost of electricity focus on how cheap coal is. They argue that reducing production from cheap but pollution-intensive coal will make for more expensive electricity. However, like Tierney, Kolata believes that sourcing from renewable energy could eventually lead to lower rates. "We've supported the renewable portfolio standard. It does have a cost cap to protect consumers. We see them getting cheaper every year. We think they're an important part of the mix. The cost trends in solar are very encouraging."

There are many ways for future electricity rates to go down while coal use also declines. The goal of Illinois' renewable portfolio standard is to get 25 percent of electricity from renewable sources by 2025 and as renewable sources become more cost-competitive, this could help shrink bills. Movements for an energy efficiency portfolio standard and net-metering (or selling power back to the grid when you're producing more power than you're using) also hold promise in bringing down local electricity rates. Distributed generation, in which power is sourced closer to the end user as opposed to centralized distribution, could do its part too in reducing transmission costs.

In this case, charges of regulation, renewables or decreased demand impacting electricity rates may carry a lot of frenzied energy, but often short-circuit under further investigation.