What is the Electric Commodity Adjustment and How Does it Relate to Your Electric Bill and Renewable Energy?
How do Coloradans Pay for Coal and Natural Gas?
Today roughly 60% of Xcel’s electricity comes from coal, 20% from natural gas, and 20% from renewable sources. There is a line on your Xcel bill called the “Electric Commodity Adjustment”. Today, it is a little over 30% of your electric bill. This is where Xcel passes their fuel costs onto you.
It’s sort of like Xcel is asking you to reimburse them for the fuel that they’ve bought on your behalf, but you have no say over how much they are allowed to spend. It makes sense for each of us to pay our fair share of the cost of generating electricity, but utilities like Xcel should have an incentive to keep those costs both low and stable. That means using more fuel-free energy sources like wind and solar.
How it affects your bill?
If coal and natural gas prices skyrocketed tomorrow, your bill will skyrocket too, but Xcel’s bottom line won’t be affected at all. In fact, coal prices in Colorado have already nearly doubled since 2004. These fuel costs are passed on to you directly through the Electric Commodity Adjustment.
Because consumers pay the cost of fuel, we also bear the risk of increasing fuel prices, but we are not empowered to make less risky energy source choices. This is what economists call a split incentive.
How it affects renewable energy:
The best high plains wind farms are cost competitive with new gas fired electricity, solar can displace the most expensive peaking power plants on the grid, and neither carries any risk of rising fuel costs. But because Xcel is not exposed to that risk, they have little incentive to move toward fuel-free power.
Similarly, under the current rules, when we eventually put a price on carbon in Colorado the cost will simply be passed on to consumers via the Electric Commodity Adjustment, without giving Xcel any incentive to invest in low carbon energy sources.
What’s the solution?
If Xcel was exposed to the risk of rising fuel prices, then they would have an incentive to invest heavily in renewable energy and energy efficiency, because they have well known up front costs.
If we demand that Xcel charges a flat rate per kWh for electricity over decades rather than constantly adjusting the price as fuel prices fluctuate, then their most cost-effective option will be to invest in risk-free renewable energy and energy efficiency.