Electricity rates now depend more on public policy and regulatory decisions than on actual costs.

Based on a newly released report from Oliver Wyman, a leading global management consulting firm, “There is a growing need to increase electricity prices. These rate increases are largely being driven by environmental, regulatory, and security requirements.” And they are adding to “financial strain at the worst possible moment.”

The report, designed to help utility companies deal with customer wrath, states that “the increases have been the most significant in the residential segment”—where they grew more quickly than other sectors. Despite declining pricing on some fuels, such as natural gas, electricity rates have risen 2.7% per year with some regions experiencing average price increases of 5.1% annually. In contrast, the consumer price index—excluding food and energy—rose by 1.7%.

Residential customers experiencing the highest increases, and/or potential increases, are those who are heavily dependent on coal-fueled generation, as required retrofits cannot economically meet existing environmental requirements—resulting in the proposed retirement of older coal-fueled plants. Existing and proposed EPA rules are having a significant impact on rates—with the vast majority of compliance costs falling on residents. The report states: “If these are enacted and enforced, the Federal Energy Regulatory Commission staff has informally estimated that 8% of our electric generation capacity, representing 81 GW of the nation’s generating capacity, will need to be retired.”

Lisa Jackson, EPA Administrator, was recently asked about the mass retirements of coal-fueled power plants as a result of EPA regulations. While they do not technically require shutting down any plant, the rules are such that plants cannot be operated economically—but Jackson doesn’t see that as her problem. “I can’t say what a business will decide to do. Some businesses are investing in nuclear, some are looking at natural gas. There are states that are leading the way on solar or wind.”

Jackson’s comment, plus the Department of Energy’s loan guarantees, makes clear that the only correct path is wind and solar. But why?