Global Demand for Energy Impacts Electricity Rates
08/25/2006

You may ask what a building boom in China has to do with rising electric rates in the United States, and the surprising answer is: a lot.

Although it varies greatly by region and by supplier, electricity rates are beginning to climb all around the country. In some areas, consumers already have seen their electricity bills go up by
as much as 40 percent or more. This comes as a surprise to many consumers who have seen relatively stable electricity rates for the last 20 years.

The reasons for these rate increases include soaring natural gas prices, escalating environmental compliance costs for power plants and structural problems in competitive markets. Factors such as these cause the wholesale price of electricity to go up, which then gets passed on to the end-use consumer. Less evident though is the fact that global competition for fuels also impacts the price of electricity for consumers in the United States.

“Simple supply and demand is why increased global competition makes the price of energy go up in the U.S. When the supply cannot keep up with the demand, prices go up,” said Dave Mohre, executive director of the National Rural Electric Cooperative Association’s energy and power division.

Worldwide demand for fuel is growing significantly. According to the Energy Information Administration, worldwide energy consumption is projected to increase by 57 percent from 2002 to 2025. Electricity consumption is expected to double during that period.

China is the fastest growing major economy in the world right now. Gross Domestic Product (GDP) there has consistently topped 9 percent compared with 3.5 percent in the United States. And there is a building boom in China. According to Chinese officials, one out of every five construction cranes in the world is in use in the Shanghai industrial region alone. This means more demand not only for energy but building materials such as steel and cement, which are used to build power plants in the U.S.

The Chinese now drive more cars than ever too. Drivers in Beijing and Shanghai are buying 7400 new cars per day. This causes a great demand for oil, which rose in China by more than a million and a quarter barrels from 2003 to 2004. That’s two times greater than the U.S. increase in demand.

India is running a close second to China in terms of its economic growth, which last year grew by more than 7 percent.

The growth in these countries and other growing economies around the world has caused them to import more coal and natural gas to run their power plants. This causes the price of both of these energy sources to go up worldwide. About 70 percent of the power produced in the U.S. comes from coal and natural gas, so this worldwide demand really affects the price of electricity here.

While many electric co-ops and their consumer-members will have to adjust to higher electricity bills in the coming years, members of co-ops do have some distinct advantages over other consumers.

Most co-op power comes from coal-based power plants. Coal is more plentiful in the U.S. and less susceptible to the sharp ups and downs of oil and natural gas prices. Also, co-ops have excellent ratings on Wall Street. Their finances are in good shape for expanding their own power generation and transmission, which will make them more insulated from the price volatility of buying electricity elsewhere.

Lastly, electric co-ops are not-for-profit and are owned by the people they serve. This ensures that co-ops
are always trying to get the best price when securing electricity to supply their local member-owners rather than trying to charge the highest price to please distant stockholders. Click here to see a list of all Kentucky electric cooperatives.

Kentucky Association of Electric Cooperatives, Inc. 4515 Bishop Lane * Louisville, KY  40218 502-451-2430 * FAX: 502-459-3209 Terms of Use