Many Americans had to crank up their air conditioning units this week, as a heat dome settled over much of the eastern United States. The cost of staying cool is higher now than a year ago, thanks to an increase in the price of electricity.
Electricity costs were up 4.5% in May compared to a year earlier, according to the Bureau of Labor Statistics. The recent increase comes after the price of retail electricity — a rate paid per kilowatt-hour for service at homes and commercial businesses — had already risen by about 20% nationwide between 2019 and 2023.
“It’s a dangerous situation,” said Katrina Metzler, executive director for the nonprofit National Energy and Utility Affordability Coalition.
With increasing costs, air conditioning can become prohibitively expensive, and “there’s an immediate risk of heat-related illness and even death this summer,” Metzler told Straight Arrow News from her home in Washington, D.C., where the “feels like” temperature hit 105 degrees.
Electricity prices in the United States obey the laws of supply and demand. Electricity powers more essentials of everyday life than ever before, and new data centers are adding demand to the grid. At the same time, infrastructure and supply chain constraints have stopped power generation companies from adding supply at the same rate.
On top of that, experts say flawed market designs, tariffs and rising natural gas prices all contribute to more expensive electricity. High prices at a time when federal support for energy efficiency is getting cut threaten to put more stress on consumers already burdened by inflation.
How fast are electricity prices going up?
From 2010 to 2020, the peak average monthly residential electricity rate only increased by about 1.6 cents per kilowatt-hour. In the past five years, it has gone up by 3.5 cents per kilowatt-hour. That equates to about $31 more per month for a home using the national monthly average consumption of 899 kilowatt-hours, according to the Energy Information Administration.
Where does electricity cost the most?
The most expensive state in terms of the average retail electricity rate and average monthly bill is Hawaii. Several states, such as California and New York, also have high prices. However, because of smaller residences and improved energy efficiency, the average monthly bill in these states is lower than in states like Texas, Florida and Alabama.
Why is electricity so expensive?
Higher prices are a result of many interconnected factors. Most of America’s power plants are getting old, as are the power lines and equipment that make the grid work. That drives up the cost of keeping the existing system running.
Transitioning to wind and solar, and the batteries that help maximize the usage of renewable energy, is often advertised as a less expensive form of energy, but construction and raw materials still require large upfront investments. Plus, as more new wind and solar arrays are built, existing power lines reach a limit on how much electricity they can handle, and utility companies have to build costly transmission lines to connect new resources.
“We need to build more transmission lines because we can’t build the wind and solar farms in urban areas,” said Ed Hirs, a lecturer and energy economist at the University of Houston.
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The average monthly electricity bill in the U.S. increased by 20% between 2019 and 2023, and prices are still rising.
Utility companies typically pass these costs to their customers. At the same time, forecasts show energy demand will skyrocket in the near future. Data centers for artificial intelligence are the biggest driving force.
Virginia already hosts the most data centers of any state. Those data centers consume about 5,050 megawatts of power — roughly equivalent to the electricity needs of 2 million households, or about 60% of all the state’s homes, according to a report from Virginia’s Joint Legislative Audit and Review Commission.
And as tech companies build more data centers across the country, the International Energy Agency expects the centers will consume nearly half of all new electricity supply added to the grid in the next five years.
“That increased demand will lead to incrementally higher prices for all consumers on that grid,” Hirs said.
At the same time, demand is surging, natural gas prices have trended up, and gas is the fuel source for more than 40% of electricity in the U.S. It’s also becoming more difficult to build new natural gas power plants.
Hirs said prospective gas plants face a five-year backlog to receive turbines that are an essential part of generating electricity. New 50% tariffs on steel and aluminum are also driving up costs.
Is the electricity market design the problem?
Beyond all of these factors, experts point to the way electricity is bought and sold and how prices are set.
“Many of the deregulated states are seeing higher retail prices,” said Noah Dormady, an energy economist and professor at Ohio State University. In these states, the company that runs the local distribution grid is different from the company that owns power plants or renewable energy generation. And another set of retail supply companies sell electricity to consumers.
“This creates an army of middleman companies,” Dormady said.
In Ohio and similar states, consumers can shop for electricity plans from different retail providers, a system intended to create more competition and drive down costs. Dormady’s research indicates that it hasn’t worked that way.
Dormady told Straight Arrow News that the prices most consumers pay are not based on market fundamentals. Instead, the retail providers’ rates are based on auctions that utilities hold months in advance with limited market competition, his research shows.
“People are paying a markup that is not trivial,” Dormady said.
Market designs may also keep developers from building new power plants.
“Pricing electricity minute by minute is the failure of these so-called ‘deregulated market’ designs,” Hirs said.
Companies have a profit incentive to keep electricity prices high, but building new power plants could eventually lower prices by increasing the electricity supply.
Who is most at risk?
Diana Hernandez, an associate professor of sociomedical sciences at Columbia University and co-director of the Energy Opportunity Lab, said not being able to afford adequate energy is known as “energy insecurity,” which she described as a “cascading experience where it’s much easier to go deeper into the hole and much harder to climb out of it.”
While researching for her latest book, “Powerless,” Hernandez found that 20% of households making $24,000 had made partial or late payments on their electricity bills. That decreases to 13% of households making $24,000 to $50,000 and 6% of households with an income over $50,000.
In 2024, a survey from Lending Tree found that 23% of all Americans could not pay part or all of their utility bill, and 34% had cut back on or skipped necessary expenses to pay their utility bills.
“There are so many people that are already underconsuming energy,” Hernandez said. When bills get too high, she said people will avoid using air conditioning when it is hot, or they will use space heaters, ovens or stoves to heat their homes when it is cold. Hernandez said these coping mechanisms present health and safety risks from heat-related illness, fire and exposure to volatile organic compounds.
Metzler, who leads an advocacy group around energy affordability, said she is most worried about the elderly, people on fixed incomes and families with young children. Both Metzler and Hernandez pointed to the 1995 Chicago heatwave that killed 739 people as an example of how real and deadly the dangers of energy insecurity are.
The situation could get worse, Metzler said, because the federal Low Income Household Energy Assistance Program (LIHEAP) is at risk of elimination in the latest budget proposed by the Trump administration and the Republican-controlled Congress. The program provides bill assistance and financial support for home weatherization upgrades to low-income households.
Metzler said LIHEAP has already faced staffing shortages, but the program “should be protected along with those people in their homes.”
