You may have noticed over the past year the rising energy costs in your area. If so, you’re not the only one. After many were forced to stay home for over a year, it’s not surprising families across the country this summer were jumping in their cars looking to escape. Unfortunately, those summer vacations got a little more expensive at the gas pump. In October 2020 oil prices were at $37.51, and by June 2021, oil prices rose to $73.84, over double!
Forcing people out of the job while handing out stimulus checks probably wasn’t a smart idea. Then again, I can’t recall a time when the government ever came up with a smart idea. Congress passed a $2.2 trillion stimulus package, which many argued, encouraged people to stay home. Can you blame them? Why work when the government is paying you to stay home? Even the not-so-bright economists started to see a correlation between the unemployment rate and the stimulus checks. With less production and more money in circulation, it became clear inflation might start to become a problem.
It’s hard enough to run a business and stay on top of your competition, but the government has made it harder with every regulation it passes. Most of the time, these regulations do nothing but help the big players while limiting the number of newcomers entering the market. In 2018, recent estimates have the average costs of regulations to the U.S. economy at nearly $2 trillion. The costs of these regulations often find their way down to the end consumers.
Energy Suppliers and Regulations
Most deregulated energy markets require the energy suppliers to be licensed by the state’s public utility commission. This often requires the energy supplier to submit licensing fees, bond requirements, along with filing quarterly and annual reports. If a report is not filed or a fee not paid on time, the utility commission may take action against the energy supplier. This often comes in the form of monetary penalties.
It is not uncommon for a business to include a compliance department to keep up with all the regulations. These additional costs do nothing to help the business grow. Oftentimes, these regulations prevent new competition from entering the market. With less competition, we can expect higher energy prices.
Renewable Portfolio Standards
Renewable portfolio standards (RPS), sometimes referred to as renewable electricity standards (RES) are a set of regulations designed to generate a greater percentage of electricity from renewable energy sources. The percentage requirements vary by state. These requirements have created an artificial market for renewable power generation. Investors have a greater incentive to invest in renewable energy sources since they know energy suppliers are being forced to participate.
There is a good reason the most popular forms of energy generation come from oil, coal, and natural gas. These resources tend to be more efficient, reliable, and cheaper sources of power generation compared to renewable sources such as solar and wind power. If energy suppliers are being forced to generate a greater percentage of electricity from renewable energy sources, then we can expect the price of electricity to increase.
According to the U.S. Energy Information Administration, as of September of 2020, 38 states including the District of Columbia have implemented an RPS program. 12 of these states, including D.C. have proposed 100% clean energy by 2050.
Inflation Making its Way to Energy Prices
According to the U.S. Bureau of Labor Statistics, energy prices from July 2020 to July 2021 increased nearly by 25%. Pennsylvania is one of many states feeling the effects of rising electricity costs. Every utility company in the state of Pennsylvania increased its default rate for generation services this past year. The highest rate increase for default services came from Penelec, a FirstEnergy company, at 30%.
With rising energy costs, more consumers are beginning to shop around for an alternate electric supplier. As electric suppliers compete, they are forced to cut costs and lower profit margins to increase their market share. Freepoint Energy, WGL Energy, and Direct Energy are just a few electric suppliers that are still offering electricity rates at competitive prices.
Are Rising Energy Costs Transitory?
The Federal Reserve has claimed many times this past year that rising inflation is transitory. Many people are led to believe that this means inflation will cool off and rising prices will return to their previous level. However, if we take a closer look, transitory inflation isn’t applied to prices but rather to the rate of inflation. In other words, prices may increase 20% or higher in the next year and may never return to their previous levels. It is only the rate of inflation, which will come back down to its previous level. The Federal Reserve currently has an annual inflation target of 2%.
If we consider all the above, then higher energy costs will be the new trend. If you live in a deregulated energy market and can choose your electric supplier, then I highly advise locking in a long-term fixed rate. These fixed rates will protect you from future increases in the energy market. Electric suppliers can offer fixed rate plans that will protect the customer for up to four and five years.