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Real Electricity Prices (Energy Prices Always Go Up, Part 5)

This article is part of an occasional series that examines the common perception that energy prices always go up.  We have examined both electricity prices (read here and here) and natural gas prices (read here and here).

An article published recently by CNSNews.com states that, according to the Bureau of Labor Statistics (BLS), “The price of electricity hit a record for the month of October” and that “Americans now pay 42 percent more for electricity than they did a decade ago.”  Sounds scary.

Is it?  Let’s see.

Here, in graphical form, are the October US City Average electricity prices, in dollars per kilowatt-hour (kWh), as found on the BLS website.

During the period of time from 2003 to 2013, October electricity prices rose from $0.093/kWh to $0.132/kWh, a 41.9% increase.

It is important to note that the data above are in “nominal” dollars and do not account for the effects of inflation.  Over the time period examined, the purchasing power of a dollar has declined, so the electricity prices presented above are not being compared on a consistent basis.  In order to make the data consistent, we can normalize it by adjusting for inflation by converting the data to “real” 2013 dollars.  Another BLS dataset can help with this.

The BLS tracks changes in the purchasing power of a dollar through its Consumer Price Index (CPI).  The CPI can be used to convert dollar values from past years into inflation-adjusted dollar values for the current year.  For example, the 2003 electricity prices can be converted to 2013 dollars as follows:

Electricity Price 2013 = Electricity Price 2003 x (CPI Base Year / CPI Current Year)

Electricity Price 2013 = $0.093/kWh x (232.9/184.0)

Electricity Price 2013 = $0.118/kWh

The graph below shows the nominal electricity prices presented above along with the same data converted to real 2013 dollars:

The 42% increase on a nominal basis equates to only a 12% increase in real dollars.  Not quite so scary.

Looking further back in time, how have electricity prices behaved in nominal and real terms?

The graph below shows October electricity prices from the same BLS dataset for the period of time 1979 to 2013.

Over this period, October electricity prices have increased from $0.053/kWh to $0.132/kWh, a 149.1% increase.

The graph below shows the same data converted to real 2013 dollars:

In real 2013 dollars, October electricity prices have DECLINED from $0.170/kWh to $0.132/kWh.  This is a 22.4% decline in real dollars.

Do electricity prices always go up?  In real terms, no.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

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Copyright 2013 by Avalon Energy® Services LLC    

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Market Update, November 6, 2013

For buyers, pricing in the wholesale natural gas market is attractive.

The graph below shows natural gas prices over the past ten years.  While we are not at the absolute low, we are near the bottom.

The next graph shows the 24 month forward curve for natural gas.  The line is upward sloping, meaning the market expects prices to rise in the future.

The story is similar with electricity as the two markets – natural gas and electricity – are highly correlated in the Mid-Atlantic.

It is a great time to be a buyer.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484- 8096, or email us at jmcdonnell@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2013 by Avalon Energy® Services LLC