Recently at Scioto Analysis, we’ve been talking about energy. We just asked our Ohio Economic Experts Panel about the potential impacts of nuclear energy, and we’ve been working on projects behind the scenes looking at funding energy projects as well as energy regulations in Ohio. In the past, we’ve also worked on a project that mapped out how the energy storage industry could grow throughout Appalachia.
The reason energy is such a pressing public policy topic is because our energy demands are quickly changing. Data centers, electric vehicles, heat pumps – electrification is coming and that means our demand is increasing.
In a vacuum, higher demand means higher energy prices. However, markets rarely work exactly like they do in a high school economics textbook, and the energy market is certainly no exception.
To better understand what actually drives energy prices, we can look to a technical report published by the National Renewable Energy Lab. In this report, researchers explain what factors led to an increase in energy utility prices between 2019 and 2023. Today, I wanted to go over some of these reasons and explain how policymakers might use some of this information.
First, a question: If people consume more energy, do you think utility costs would increase or decrease? If you realized that this is a trick question and guessed they decrease, you’re right!
The reason more consumption can lead to lower utility rates is because energy utilities have massive upfront costs that they need to finance by selling electricity. In other words, when you plug your phone charger into an outlet in your home, you aren’t just paying for the electricity that you are consuming, you are also paying for a portion of the massive capital expenditures that utility companies incur each year.
When more people consume electricity, the laws of supply and demand tell us that the cost of that electricity should increase. However, when that also means everyone gets a smaller slice of the fixed costs pie, they find that the unit cost of electricity decreases.
Another reason that increased consumption might not always mean increased costs is because the cost of fuel for electricity generation is extremely variable. According to the report, about 40% of electricity generation in the country is fueled by natural gas. The price of natural gas can vary a lot from the supply side, meaning that only focusing on the demand for electricity doesn’t give us the full picture of prices.
Diversifying the means by which we generate electricity will make the price of electricity more consistent from the supply side. As renewable energy generation becomes more common over time, we should expect the demand side effects to have relatively larger impacts on the utility cost of electricity.
For policymakers concerned with rising costs, understanding the drivers of utility costs is extremely important. One takeaway from this report is that capital expenditures are a huge factor driving utility costs, and data centers are going to change the energy landscape. These facilities require enormous amounts of reliable electricity which means utilities must build out new transmission lines and reinforce existing infrastructure to handle the load.
For policymakers, this shift underscores the need to plan ahead. Unlike fuel costs, which fluctuate with markets, transmission and distribution investments are long-term commitments that lock in expenses for decades. If regulators and legislators fail to anticipate these needs, communities may face sudden rate hikes as utilities scramble to recover costs. Careful oversight of utility capital projects can spread costs more evenly and ensure that economic development tied to data centers and electrification does not come at the expense of affordability.