Electricity Price Inflation

Residential electricity prices in the U.S. have risen from an average of 7.83 cents per kilowatthour in 1990 to an average of 11.44 cents per kwh in 2010. This is a 46% increase in 20 years and sounds like a lot but as you can see from the chart below for many years electricity prices did not keep up with overall inflation (the red line is falling).

Inflation may affect Electricity to a greater or lesser extent than normal commodities. This is because, utilites in most countries are “regulated monopolies” meaning that since it would be inefficient for one company to run wires to your house and a different company to run wires to your neighbor’s house, the government granted a monopoly to the local electric company to run wires to everyone’s house. But since having a monopoly would enable them to charge whatever they wanted, regulations require the utility to get approval for rate increases from a governing agency. Generally, the governing agency allows a certain profit margin and as costs rise they allow prices to rise equally. In recent years, utilities have been able to add a variable to their billing to cover “fuel surcharges” so your electric rates can fluctuate with the price of fuel.

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How Do Electricity Prices Compare with the Inflation Rate?

Residential Electricity costs on a nationwide average basis from 1990 through 2010 have not kept up with inflation. This means that relative to everything else electricity prices have gone down. This does not mean that this is the case in all localities. Individual states and even local regions will differ. One thing that may have kept a lid on the Inflation Rate of Electricity during this period was the deregulation of electric companies allowing competition among electric suppliers. In recent years the government has attempted to deregulate utilities by splitting the electric company into a distribution company and a production company. This way the lines are owned by the distribution company and you can choose who you buy your electricity from i.e your supplier. The supplier then pays rent to the line company for using their lines to deliver electricity to your house.  This allows people to choose “green power” if they are willing to pay the price or go for the cheapest producer if they prefer. Thus introducing competition into a market that previously had no competition. Basic economics tells us that an environment with competition will have cheaper prices than one without competition.

The following table shows the Nominal price the average U.S. residential consumer paid for electricity during a given year from 1990 through 2010. It also shows the “Inflation Adjusted” price of electricity in 2010 Dollars. As we can see, although the nominal price increased, overall price increases did not keep up with the overall inflation rate so the inflation adjusted price decreased from 1990 through 2010.

The inflation adjusted price of electricity in 1990 measured in 2010 dollars was 13.06 cents per KWH.