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Rising Electricity Prices for Businesses in California: How to Combat?

6/20/2022

Price hikes for electricity are not a new phenomenon for California. They are something businesses have been dealing with for decades. However, 2022 brought the worst single year over year increase in over a decade. Last year the California Public Utilities Commission (CPUC) approved major rate increases across all three investor owned utilities (IOU, meaning SDGE, SCE and PG&E) of about 20% for all industrial customers. Now businesses are absorbing these new energy costs while trying to stay competitive.

How much have energy rates risen in the last ten years?

It is always difficult to pin down a precise figure for how much energy costs rise in the year they occur, because there are so many different rate structures and usage patterns. One would need to compare how many customers are taking services at every tariff level and calculate the changes to each tariff to generate a weighted average annual increase. However, we can gain insight by looking at the past and comparing it to specific rates. The Energy Information Agency (EIA) of the federal government tracks total energy consumed and the weighted average cost per kilowatt hour for each state on a yearly basis, however these rates published years after the data is generated. As you can see in Figure 1. California’s energy rates have had steady growth from 2006 to 2020 with a compounded annual growth rate of 2.4% per year from 2005 to 2020

Figure 1 — Historical Blended Energy Rates

Recently we at Pacifico Power analyzed rates for industrial customers in the IOU service areas to see what happened the last two years and what the future holds for all California rate payers. As seen in Figure 1, industrial rates track higher than average California rates, but for the most part consistently grow similarly to California average rates.

If current industrial rates are a good indicator of blended average rates, then California businesses have seen a ~5% and ~20% increase in electricity rates in 2021 and 2022 respectively. These numbers track well with several press releases by the IOUs. In late 2020, PG&E announced it would increase customers’ rates by 8% to help pay for wildfire mitigation efforts. Southern California Edison has similar press releases . All indicators point to needs to further upgrade the distribution and transmission system to alleviate wildfire concerns which in turn will be the primary driver of future increases. Add inflation and high natural gas prices and we will see even greater electricity rates.

How much do we expect energy rates to rise in the future?

We expect substantial rate increases for all California utilities over the next three years. Pacific Gas and Electric has already indicated they will need to raise rates for industrial customers by at least an additional 22% by the end of 2026 . The primary justification for the rate increases is continued investment in making the distribution and transmission system resilient against wildfires. Ed Randolf, head of the CPUC, forecasted in Feb 2021 that we should expect to see 20 – 40% higher rates by the end of 2025 .

As already mentioned, natural gas prices have skyrocketed. The recent EIA data shows the natural gas prices have moved from $2.00 per per MMBTU the beginning of summer of 2020 to over $8.00 per MMBTU to start summer of 2022. Electricity costs track closely with natural gas because natural gas generators supply 38% of California’s electricity. The increase in gas price will be another big driver in increased electricity prices for the future.

What are the alternatives or solutions?

The discussions about increasing electricity prices will keep happening, so it is essential to find reliable solutions for your business to manage energy price risks. There are ways to hedge and help combat electricity price volatility.

On-site renewable energy generation can be an effective way to save on monthly utility bills. California is set to change net metering soon, however, with the current regulations renewable energy systems with batteries have been shown to reduce the levelized cost of energy by as much as 20 – 40%. Businesses can connect with an alternative energy development company to explore their options. Read More

Energy efficiency can be another incredible way to decrease costs and control carbon emissions. It also helps the business meet its sustainability goals and improve the brand reputation. Read More

Wrapping up

Energy prices in California have always had an upward trajectory. California businesses just absorbed massive energy price increases over just the course of the last two years and they will see continued increases over the next few years. Energy solutions are the need of the hour because they help save on utility bills and support your sustainability goals. The key to success is to find a company specializing in solar photovoltaic and battery projects. While doing so, make sure that the company offers financing support and end-to-end care to meet your maintenance requirements.

The Pacifico Power team has been developing renewable power projects globally for over a decade, with experience in designing, contracting, permitting, consulting, interconnection, energy trading, and financing. The company provides a variety of energy services for a variety of clients. If you’re looking for a microgrid power system or any other energy efficiency product, reach out to us today.