Electricity's Variable Cost All-Time Low Percentage?

Deck: 

Pertinent to rate design debate, variable falling further behind fixed cost

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The public naturally believes that most electric utility costs are variable, if only because utility bills are mainly based on per kilowatt-hour rates. Utilities' fixed costs, for generation, transmission and distribution infrastructure, are largely invisible to the average person.

This perception, or rather, this misperception, is a problem in the rate design debate that is taking place around the country. Utilities have proposed to make utility bills based more on fixed charges and less on variable charges, to better reflect the mix of utility costs. 

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Opponents have cried foul. Among their complaints, they doubt the fixed share of electricity's cost is all that large, in comparison to the variable share. 

There's evidence however that the fixed share is large and that it's growing. Electricity's variable cost is apparently at an all-time low percentage; or at least near the all-time low. 

Just look at fossil fuel cost as a percentage of the revenues from the sale of electricity. Fossil fuel cost is the predominant factor in electricity's variable cost. In 2014, fossil fuel cost for the generation and ultimately the sale of electricity, nationally, was around 82 billion dollars. Revenues from the sale of electricity were 393 billion. Therefore, fossil fuel cost, the predominant variable cost, was approximately 21 percent of revenues. 

You may have suspected fossil fuel cost would be a greater percentage. I certainly did. This low percentage suggests that the fixed portion is well over 50 percent of all of electricity's cost.

The surprise, that fossil fuel cost is as low as 21 percent, is partially due to the downward trend of fossil fuel cost. As recently as 2008, fossil fuel cost was 34 percent of revenues, far higher than it is today. 

The downward trend comes from the rapid fall in fuel price, especially for natural gas but also for coal. Additionally, since 2008, the grid is generating more electricity in which there is no fossil fuel cost, from wind farms particularly. 

Indeed, the Energy Department predicts that fuel price will be even lower in 2015 than it was in 2014. The average price for natural gas is forecast to get to $3.29 per million BTU, in 2015, down from $4.98 in 2014. The average price for coal, residual oil and distillate oil in 2015 is also expected to be significantly down.

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Perhaps fossil fuel cost will drop to below 20 percent of revenue in the year just past, 2015, with implications for the share of electricity's cost that is variable.

 

Starting with the February issue, Public Utilities Fortnightly will exclusively present such insightful measures of the electric and gas utilities industry, in our new Mega-Metrics centerfold.

Steve Mitnick, Editor-in-Chief, Public Utilities Fortnightly
E-mail me: mitnick@fortnightly.com