Over the past quarter century, electricity prices in America have increased by an average of 1.8 percent per year. In January 2022, both Entergy and Mississippi Power increased their rates by $7.81 per month and $5.27 per month respectively, affecting over half a million Mississippi residents.
According to Mississippi’s Public Service Commissioner for the Central District, Brent Bailey, this price hike was due to the volatility of natural gas prices. But blaming rises in the price of natural gas also overlooks the role that solar energy is playing in power price increases.
We already know from research produced by the University of Chicago that setting renewable energy production targets in a state pushes up the price of power.
But our state, thankfully, does not have those types of targets. So how come renewables are pushing up the price of electricity in Mississippi?
It has a lot to do with the bureaucratic way in which energy prices are set in our state.
In a properly functioning market, a company has an incentive to keep the cost of producing things down so that they can set their prices low and still make a margin.
The trouble is that the power industry in our state, as across much of America, is a near monopoly. Entergy, for example, supplies power to 45 counties and 461,000 customers. It’s not just a near monopoly in those parts of the state it covers, it is a vertically integrated monopoly, meaning that it not only produces the power but distributes it. It would be a little bit like Krogers also owning the farms and food processing plants used to stock its shelves.
The price that Entergy insists that you pay is not an amount decided by free and fair competition. It’s the amount that the Public Service Commission allows them to charge you.
In a free market, the price of a product is whatever customers are willing to pay. When a price is set by the government and corporate bureaucrats, they calculate it on a cost-plus basis. That is to say, they work out what it costs them to produce it, and then add on their margin of around 10 percent (the percentage can fluctuate). This automatically removes the incentive to produce more efficiently.
This is precisely what happened when $7 billion was spent on the disastrous Kemper county ‘clean coal’ initiative. In 2014, Entergy customers who used 1,000 kWh per month saw a 2.6% rise in their utility bills to allow the producer to claw back some of the costs.
Something similar is happening with solar.
We are invited to feel good every time the energy producers announce another solar project. Did they tell you you would be paying extra for it?
The recently lauded Sunflower County solar project will add an additional $1.38 to your bill every month. That’s $16.56 a year, which might not sound like much, but add in the other renewable schemes, as it soon becomes quite a cost.
According to some estimates, the MS Solar, Pearl River Solar, Wildflower, Lowndes County, Delta’s Edge and Cane Creek solar projects alone could add something like $116 to each customer's annual bill.
The average electric payment of a Mississippi resident is $1,583/year. What this means is that solar farms in just the past three years have caused a 7 percent increase in utility payments.
The way that electricity prices are set in our state – bureaucratic negotiations between government and corporations on a cost-plus basis – more or less guarantees that customers get bad value for money.
Far from encouraging energy producers to keep costs down, if the producers are able to add a 10 percent margin to their cost base, they weirdly have an incentive to increase costs. Why should they care if solar farms are not the cheapest way to power your home?
Cost plus 10 percent gives producers an incentive to 'go green.' But green energy is more expensive than producing power by burning oil, gas and coal. Perhaps if the Public Service Commission really acted in the consumer interests, it would pass on the cost of renewables to the energy company shareholders?
Michelle Brodsky writes about energy policy at the Mississippi Center for Public Policy.
