The Role of Fuel Cost Volatility in Rising Electric Bills

When Duke Energy customers across the state got their utility bills earlier this year, many were shocked to find dramatic increases in the rates they were paying. The central reason: the high cost of natural gas.

In fact, EQ Research recently issued areport finding that between 46% and 67% (depending on where they live in North Carolina) of Duke Energy’s residential retail rate increases since 2017 can be attributed to increasing gas fuel costs.  

And the increases aren’t over. Last year theNC Utilities Commission (“Commission”) approved an 11.7% increase that will be spread out over 16 months for electric bills in Duke Energy Carolinas (DEC) territory – the central and western parts of the state. Customers in Duke Energy Progress (DEP) territory will also pay more after the Commission approved an 11.3% hike last year. Natural gas prices go up and down with the world market, and Duke Energy is allowed to pass along 100% of its fuel costs to customers.

Fuel-free resources like solar and wind can help insulate us against future price volatility, producing reliable energy at predictable costs. Solar is the lowest-cost form of energy based on its levelized cost of energy (LCOE) according to a 2023 report by Ernst & Young, which found that the global weighted average LCOE for solar is now 29% lower than the cheapest fossil fuel alternative. Additionally, wind energy matches well with solar to provide the same degree of reliability that utilities and ratepayers alike across the country have come to expect.

Battery storage is rapidly making both of these technologies even better. Lithium-ion batteries generally hold power for four hours – long enough to extend solar production well after the sun sets. Newer technologies, like iron-air batteries, are expected to bring multi-day storage.

And let us state the obvious: sunshine and wind are free, and they don’t cost more if war breaks out elsewhere in the world. Natural gas prices vary unpredictably, and customers bear the risk.

How are our electric bills determined?

That’s the role of the Commission, a body appointed by the governor and the legislature. The Commission regulates the rates and services of all investor-owned public utilities in North Carolina. That includes Duke Energy Progress and Duke Energy Carolinas (“Duke Energy”), which serve most of the state. By law, the Commission must provide “just and reasonable rates and charges for public utility services and promote conservation of energy.” Investor-owned utilities are monopolies that don’t have to compete with other businesses, so they are regulated differently than normal industries. Their rates, infrastructure investments, and maintenance are governed by the Commission, albeit with significant input from the utilities themselves.

Not only can Duke Energy pass all fuel cost increases along to customers through fuel riders, but there is also another profit motive for natural gas built into North Carolina’s regulatory system. Duke Energy is allowed to earn an approximately 10% profit on capital expenditures, an incentive to push for expensive new generation infrastructure.

How does the Commission arrive at “just and reasonable rates?”

Primarily they do this through rate cases which occur every three years. Fuel riders are charges, not included in base rates, that allow a utility to recover the costs of specific programs or purchases and are handled separately from rate cases. Rates are set by the Commission and then cannot legally be changed, so riders provide a way to adjust bills separate from rates. The problem of rising NC energy bills has been widely reported, such as by WUNC.  

Duke Energy’s 2023 filings for fuel costs were unique given the size of the proposed increase, requiring the utility to ask for a novel way to recover these costs. To avoid rate shock for ratepayers, the utility proposed spreading the increase out over more than a year.

See a Duke Energy Progress (DEP) notice to customers of the change of rates outlining the increases here. Duke Energy customers have already seen bill increases and will see another increase in late summer or early fall due to high fuel costs. The fuel cost increase was associated with a 2022 natural gas price spike, but gas prices have long been subject to major swings and spikes – and customers bear the risks of fuel price volatility – not the utility. It’s like gambling with someone else’s money, little risk is on the utility, and lots of risk is on customers.  

With gas prices currently going back down, a new filing from Duke Energy shows an anticipated decrease in fuel costs to ratepayers, but there’s no guarantee that the decrease can be sustained. Duke Energy’s planned gas plant build-out is one of the largest proposed in the United States, and it would leave customers vulnerable to future price increases. 

To protect customers from rate shock caused by the price swings of an international commodity like gas imported into North Carolina, the utility should look to sources of energy like solar, wind, hydropower, and energy storage. Over the long term, as fuel-free resources comprise more of our energy generation mix, and then all of our energy resources – there may no longer be a need for fuel riders at all.  

Citations:

• https://www.edf.org/media/new-analysis-shows-reliance-gas-primary-driver-rise-duke-energy-power-bills
• https://www.wunc.org/2023-08-23/fuel-costs-push-up-duke-energy-bills-in-central-and-western-north-carolina
• https://www.eia.gov/todayinenergy/detail.php?id=53579
• https://www.pv-magazine.com/2023/12/08/solar-lcoe-now-29-lower-than-any-fuel-fossil-option-says-ey/#:~:text=Solar%20has%20rapidly%20fallen%20in,60%25%20over%20the%20same%20period.&text=EY%20forecasts%20that%20solar%20and,the%20global%20baseload%20electricity%20source.
• https://www.reuters.com/world/us/us-offshore-wind-energy-development-could-ensure-east-coast-grid-reliability-2024-03-21/

Key Resources:

• Duke Energy Carolinas (DEC)
  • Rate Case (E-7 Sub 1276)
    • Order Accepting Stipulations
    • Notice to Customers
    • Guide to Compliance Filings
  • Fuel riders
    • 2023 (E-7 Sub 1282)
      • Order Approving
      • Compliance Tariffs
      • Customer Notice
    • 2024 (E-7 Sub 1304)
      • Application
  • Duke Energy Progress (DEP)
    • Rate Case (E-2 Sub 1300)
      • Order Accepting Stipulations
      • Notice to Customers
      • Guide to Compliance Filings
    • Fuel Rider (2023—E-2 Sub 1321)
      • Order Approving
      • Compliance Tariffs
      • Customer Notice