2016’s Most & Least Energy-Expensive States

WalletHub

July 19, 2016

By Richie Bernardo

Get ready to crank up your air conditioner — and your utility budget. July tends to be the hottest month of the year. So if your heat-averse body forces you to be more consumptive than conservative, this month’s much-higher-than-usual power bill could burn a hole through your wallet.

In the U.S., energy costs eat between 5 and 22 percent of families’ total after-tax income, with the poorest Americans, or 25 million households, paying the highest of that range. And lower energy prices don’t necessarily equate to savings. Where we live and how much energy we use make up a larger part of the math. Electricity might be cheap in Southern Louisiana, for instance, but its scorching summer weather could still result in higher costs for its residents than the temperate climate in more energy-expensive Northern California, where heating and cooling units stay idle most of the year. ...

Ask the Experts

According to the U.S. Energy Information Administration, the highest energy consumption of the year is recorded in July, followed by August. Energy costs therefore tend to rise as temperatures climb. For insight into the various ways Americans can reduce their dependence on traditional energy sources — and thereby diminish out-of-pocket costs — we asked a panel of energy and policy experts to weigh in.

Geoffrey Parker

Geoff Parker
Professor at Thayer School of Engineering and Director of the Master of Engineering Management Program at Dartmouth

What are some good tips for saving money on energy bills?

Some basic steps are to replace old mechanical equipment. New appliances (refrigerators, dishwashers, laundry machines), air conditioning units, and hot water heaters have all become much more efficient. Other areas to examine are the heating systems and laundry dryer. Moving from electric to natural gas can make a significant difference since that avoids the cost of energy conversion from primary fuel to electricity. A third step is to install energy efficient windows and more insulation. If the region’s power provider offers a time of use pricing program (lower prices for off peak consumption), then consumers can take advantage of that. A growing number of utilities have implemented advanced meters that allow them to analyze their customers' energy usage and include in customer bills individualized suggestions on how to save energy. In other cases, the utility may offer a reduced cost energy audit that can help customers identify cost-effective energy savings.

Finally, for those who need to commute, it makes sense to look at a more efficient vehicle. Consumers might avoid the temptation to purchase a vehicle for the most extreme use they can imagine (such as a pickup truck for moving 4x8 sheet rock or plywood). Utility vehicles can easily be rented on the rare occasions they are needed.

What makes energy costs higher in some states than in others?

There are numerous reasons why energy costs differ by state. For electric power, it depends upon the mix of generation equipment that is in the region. For example, areas served by older nuclear power or coal plants can have lower energy costs because the assets have already been paid for. Because of natural gas fracturing ("fracking"), the price of natural gas has fallen dramatically over the past decade. Power prices are often set by the most expensive unit in a system, so lower natural gas prices translate directly into lower power prices.

However, one side effect of low natural gas prices is that older, smaller nuclear plants are getting shut down. These would be viable with relatively minor subsidies that are lower than current solar and wind credits. The rationale for doing this is to diversify energy supply as a hedge against future natural gas price increases. In addition, nuclear power tends to be replaced with additional gas fired generation which adds more CO2 to the atmosphere and counteracts other efforts to reduce CO2 emissions. A carbon tax would achieve the same goal, but has so far proven to be a political non-starter.

Energy prices are also determined by regulatory and tax policies at the state level. Some states tax transportation fuel (gasoline and diesel) at higher rates than other states. In addition, states such as California have significant air pollution problems and have acted to curb pollution by requiring very specific blends of gasoline that are unique to the state. This drives up consumer cost because the refineries must be carefully adapted to the production of unique gasoline blends.

Are tax deductions and credits effective at incentivizing households to be more energy efficient?

Tax deductions have not proven to be particularly effective in influencing consumers to purchase more efficient products. However, many utilities and some states offer other types of financial incentives. For example, the dramatic growth in solar power installations shows the impact of tax policy on residential power consumption. However, there are some distortions because residences that use less power are avoiding the full cost which includes system maintenance and reliability. This has the unintended consequence of shifting those costs to households that do not install solar systems or improve energy efficiency. To the extent that lower income households are less likely to adopt efficiency improvements or solar rooftop equipment, there is a shift of costs to those lower income households. This suggests that efficiency programs need to be carefully thought through before being implemented.

Do you believe the government should continue to provide energy assistance to low-income households? If so, what’s the best way?

Many low income consumers can receive assistance with their utility bills through a federally funded Low Income Home Energy Assistance Program or other state supported programs. Additionally, many states offer some form of rate discounting to low income consumers. These discounts vary in form from state to state and can change over time. Such programs reflect a belief that energy, like food or shelter, is an essential service.

One can envision a “life-line” level of energy similar to POTS (plain old telephone service) that ensured the ability to call 911 in the case of an emergency. This could be priced below actual cost and cross-subsidized by other households. However, the rate design on such a scheme would have to be carefully considered to avoid unduly penalizing other households.

What is the impact of the recent oil price drop on energy efficiency? Is cheap oil inhibiting the transition to renewables?

We have already seen evidence the cheap oil is leading to a reduction in small, energy efficient car sales and a corresponding increase in the sales of light trucks such as SUVs that consume more energy. Consumers appear to have a shorter memory than the life of their vehicles, making it likely that they will see higher prices while driving a less efficient vehicle.

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