Posted April 25, 2017
Take a guess. If you’re reading this column, at minimum you’re something of an expert in energy. Your guess should be better than most.
What percent of electricity’s cost is the cost of fuel?
While contemplating your guess, consider the question’s importance.
Fuel cost is the most prominent variable cost in the provision of electric utility service. It’s common sense, to the public at large, not just experts like you, that the more electricity a consumer uses, the more fuel is burned by the utility industry. And, so, the more fuel cost is incurred by the industry.
No other variable cost comes close. Use more juice, by adjusting the wall thermostat, or by leaving the basement lights on. There’s no other utility expense that increases as a result. Not obviously, not significantly.
A consumer’s bill is mainly variable. The more electricity a consumer uses, the higher the bill. Consumers can only conclude that a very large percent of electricity’s cost is the cost of fuel.
Ask a friend or relative who isn’t an expert like you. They might guess that fifty percent or more of electricity’s cost is the cost of fuel.
But you know better. Experts know the utility industry is capital-intensive. While fuel is a major and variable cost component, experts know that grid infrastructure construction, maintenance and operation are major and fixed components.
Times up. What’s your guess? If you knew that around fourteen percent of electricity’s cost is the cost of fuel, stand up and take a bow. Cue the applause.
In 2016, the Energy Department reports that approximately fifty-five billion dollars were spent by electric utilities and independent power producers to purchase power plant coal, petroleum liquids, petroleum coke and natural gas. 2016 revenues from electricity sales were three hundred and eighty-one billion.
Thus, just fourteen percent of electric bills paid for fuel. That’s way below the fifty percent your brother-in-law guessed.
This percentage has been falling over time. In 1973, approximately seven billion dollars were spent to purchase power plant coal, petroleum and natural gas. 1973 revenues from electricity sales were thirty-four billion. Thus, in that year, twenty-one percent of electric bills paid for fuel.
From twenty-one percent to fourteen percent to …? How much further will fuel – electricity’s most prominent variable cost – fall?
When the cost of fuel falls below ten percent, as it likely shall in coming years, as renewable generation grows, how can electric bills continue to be overwhelmingly variable?
Number-crunching and insights by the magazine for commentary, opinion and debate on utility regulation and policy since 1928, Public Utilities Fortnightly.
Steve Mitnick, Editor-in-Chief, Public Utilities Fortnightly
E-mail me: email@example.com
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