Electricity rates in the U.S. have surged by over 33% in the last decade, rising from 12 cents per kilowatt-hour (kWh) in 2013 to 16 cents per kWh in 2023 (EIA). For businesses across industries, this upward trend poses significant financial and operational challenges, especially as energy-intensive sectors like manufacturing and AI-driven data centers expand.
Understanding the forces driving these increases is critical for business decision makers like you, looking to mitigate costs and maintain stability.
In this blog, we’ll explore the drivers behind rising electricity costs, their implications for businesses, and actionable strategies to tackle these challenges.
Key Drivers of Rising Electricity Rates
1. The Growing Supply-Demand Imbalance
The electricity demand in the U.S. is growing faster than supply. This is largely fueled by three forces: rapid industrial expansion, infrastructure delays, and increasing population needs.
Industries like artificial intelligence (AI) and data centers are consuming unprecedented amounts of electricity. AI workloads, in particular, require up to nine times the computing power of traditional applications, and this demand is expected to grow exponentially in the coming decade. Meanwhile, incentives to bring manufacturing back to the U.S. are driving increased energy use from steel, automotive, and other energy-intensive industries. On the residential side, steady population growth—around 1.6 million people in 2023—continues to push electricity demand higher.
Unfortunately, infrastructure development has not kept pace. Building reliable power plants, such as natural gas or nuclear facilities, takes 3–5 years, leaving a significant lag in supply. While renewable energy sources like solar and wind are being deployed more quickly, their intermittent nature limits their ability to reliably meet growing demand.
2. The Retirement of Dispatchable Power Plants
The U.S. energy grid is undergoing a dramatic transformation as traditional power plants—coal and natural gas facilities—are being retired faster than they can be replaced. Since peaking at approximately 318 GW in 2010, coal-fired capacity in the U.S. has declined by over 118 GW as of 2022, with further reductions projected to bring the total decline to nearly 159 GW by 2026. EPA regulations enforcing stricter emissions standards have been a significant driver of these retirements.
This has left the grid increasingly reliant on renewable energy sources like solar and wind, which, while environmentally beneficial, are not dispatchable. Dispatchable power sources can be turned on or off based on grid needs, providing critical reliability during demand surges. In contrast, renewable sources depend on environmental conditions—solar panels don’t produce electricity at night, and wind turbines can’t operate without sufficient wind.
Nuclear energy, a carbon-free and reliable alternative, offers a potential solution, but new nuclear plants face steep costs and long construction timelines, preventing their rapid adoption.
3. Market Dynamics and Natural Gas Prices
Natural gas remains the dominant fuel source for electricity generation in the U.S., accounting for over 40% of the energy mix. As such, fluctuations in natural gas prices directly impact electricity costs. Over the past two years, several factors have driven significant price volatility.
The U.S. has emerged as the world’s leading exporter of liquefied natural gas (LNG), with international buyers paying a premium for American supply. This increased export volume has tightened domestic availability, driving up prices at home. Geopolitical events, such as the Russia-Ukraine war, have further disrupted global supply chains, pushing natural gas prices higher and introducing new risks for electricity pricing. With LNG exports likely to remain a priority for policymakers, businesses should expect continued volatility in natural gas markets—and by extension, electricity rates.
4. Seasonal and Climate Trends
Shifting seasonal patterns are complicating traditional energy planning. Historically, electricity prices peaked during the summer months when air conditioning drove demand to its highest levels. However, extreme winter weather is now outpacing summer in certain regions, as grid operators struggle to maintain infrastructure during freezing conditions.
Climate change has extended the duration of warmer summer months, delaying the onset of cooler fall weather and shrinking the traditional “shoulder months” of spring and fall. These shoulder months have historically offered businesses an opportunity to secure favorable energy rates during periods of lower demand. As these periods become less predictable, energy hedging and procurement strategies must adapt accordingly.
5. Regulatory and Environmental Policies
Environmental policies aimed at reducing greenhouse gas emissions have accelerated the transition away from fossil fuels. While this shift is critical for long-term sustainability, it has introduced short-term challenges for businesses.
The forced retirement of coal plants under EPA regulations has reduced grid capacity, leaving renewables to fill the gap. However, scalability issues with renewables persist, as their intermittent nature limits their ability to fully replace dispatchable power sources.
Looking ahead, the incoming administration’s emphasis on increasing natural gas production and LNG exports may provide temporary relief to electricity prices but risks exacerbating long-term volatility.
Four Proactive Strategies for Businesses
Rising electricity rates require businesses to adopt more proactive and flexible energy strategies. The following measures can help mitigate costs while enhancing operational resilience:
1. Improve Energy Efficiency
Investing in energy-efficient upgrades offers immediate and long-term savings. Replacing outdated systems with energy-efficient equipment, like smart HVAC systems and LED lighting, can reduce energy consumption and cut energy costs significantly. According to the U.S. Department of Energy, LED lighting uses up to 90% less energy and lasts 25 times longer than the typical lightbulb. Businesses should also conduct regular energy audits to identify inefficiencies and optimize their energy use.
2. Develop Strategic Energy Procurement Plans
Proactively managing energy procurement can protect businesses from market volatility. For instance, securing fixed contracts during low-demand periods can lock in favorable rates, while balancing fixed and variable pricing models allows businesses to capitalize on market lows while maintaining cost stability.
3. Leverage On-Site Energy Solutions
On-site energy solutions provide greater independence from the grid. Backup generators can help businesses maintain operations during unexpected outages, reducing the risk of downtime. Meanwhile, rooftop solar installations can significantly lower long-term electricity costs, with savings varying based on energy usage, location, and system size.
As renewable technology becomes more accessible, on-site generation will play an increasingly important role in reducing costs and supporting sustainability goals.
4. Implement Peak Load Management
Managing peak electricity demand is one of the most effective ways to control costs. Businesses can reduce energy consumption during high-demand periods by shifting operations to off-peak hours. Participating in demand response programs, which incentivize businesses to lower energy usage during grid stress, offers additional savings.
Why Pilot Energy?
Pilot Energy combines data-driven insights with customized energy procurement strategies to help businesses mitigate rising energy costs.
• Market Monitoring: Pilot tracks natural gas prices, regulatory changes, and grid operator forecasts to stay ahead of trends.
• Actionable Insights: Complex market data is distilled into clear, actionable strategies tailored to client needs.
• Comprehensive Solutions: From energy procurement strategies to on-site energy solutions, Pilot helps businesses navigate today’s volatile energy landscape.
About Pilot Energy
Founded in 2001, Pilot Energy is an unbiased and independent energy procurement advisor that empowers leaders to confidently know when, where, and how much energy to purchase by leveraging our unique blend of industry knowledge and innovative digital platforms. Putting our know-how to work daily, we drive clarity and control in decision-making and take pride in providing unparalleled personalized service. Guiding businesses with strategic innovation while committing to sustainable solutions.
Ready to improve your energy procurement strategies and, in turn, your energy cost management? Schedule a free consultation from Pilot Energy today!
