The increase is somewhat surprising given the top input cost for electricity—natural gas—has gotten much cheaper in the past two years.

Natural gas generates about 42% of U.S. electricity, the largest share of any source. Natural-gas prices shot higher after Russia invaded Ukraine in 2022, because more U.S. gas was being sent to Europe to replace Russian supplies. But prices have fallen sharply since then, and now trade under $2 per million British thermal units, down from highs above $9 in 2022. 

Utilities pass along higher fuel costs to consumers, but the way they do so differs by state. In some states, utilities have reduced electricity prices as natural-gas prices have fallen. But other utilities have continued raising electricity rates months after gas prices have dropped.

The Energy Information Administration warned last year the decline in natural-gas prices might not show up in bills until sometime in 2024.

“Even though natural gas is low now, the way things work in electricity is there’s always a delayed fuse,” said Tyson Slocum, the director of Public Citizen’s Energy Program.

In addition, about half of the average consumer bill has nothing to do with what fuel is used to generate electricity. It reflects the cost of transmission and distribution. And those costs are rising fast, according to consumer advocates.

Utilities are spending heavily to ramp up their transmission infrastructure as electricity demand grows because of the advent of electric vehicles and data centers for artificial intelligence applications.

Increasingly, those costs will be passed along to consumers.

“I expect it to accelerate,” wrote David Springe, executive director of the National Association of State Utility Consumer Advocates, in an email to Barron’s. “A lot of spending has yet to hit the consumer bill.”

In Indiana, for instance, two utilities are attempting to raise rates to pay for a variety of priorities, including the cost of transitioning away from coal-power generation to cleaner options.

Duke Energy

is asking regulators for permission to raise residential rates by about 19%, or $27.63, a month for an average customer. CenterPoint Energy Indiana South is asking for a 16% overall increase.

In testimony to Indiana’s Utility Regulatory Commission, Duke Energy cited “dramatic inflation,” the increasing cost of capital, and a growing rate base for why it is seeking higher rates. CenterPoint cited the energy transition and reliability investments, among other things.

Ben Inskeep, the program director for Indiana’s Citizens Action Coalition, said the utilities are also seeking considerably higher returns on equity for their investments. Duke Energy is asking for a 10.5% return, while CenterPoint is looking for 10.4%.

In response to Inskeep, Duke Energy spokeswoman Angeline Protogere said its request is in line with other major utilities, which have lately been asking for rate increases of between 10% and 10.8%. The commission has mostly approved returns on equity for investor-owned utilities of between 9.5% and 10%.

CenterPoint also said its request is consistent with competitors, and that its witness in its rate case recommended the company ask for an even higher return of 10.6%.

Similar rate hikes could spread throughout the country in the years ahead, some electricity experts predicted. 

“It’s going to get a lot worse,” Springe wrote. “I don’t see anything in the future that indicates price increases will slow down, really quite the opposite.”

Adding to the pressure, natural-gas prices are poised to rise again in the coming years, likely leading to higher electricity costs.

Futures traders are predicting that prices could rise above $4 per million BTUs by December 2025 as new liquefied natural gas export plants are built, allowing more gas to be shipped to Europe and Asia. Once natural gas companies have access to new markets, it will probably cause domestic prices to rise.

Write to Avi Salzman at avi.salzman@barrons.com