Why Communities Can and Must Consider Electricity Affordability and Risk Together

Just as investors balance risk and reward by building portfolios of stocks, we should pursue diverse energy strategies.

American electricity customers and their advocates have good cause to be worried. Since 2020, residential electricity prices for urban Americans have risen by 40 percent, and current trends suggest prices will continue to increase. Natural gas, which supplies ~40 percent of America’s electricity, is projected to grow in price in the coming years. Gas turbine shortages and growing obstacles for wind and solar development are limiting new supply. And utilities are upgrading aging infrastructure to better withstand natural disasters, passing costs onto customers.

At the same time, utilities are scrambling to meet ballooning electricity demand. Data center proliferation, along with industrial growth and electrification, could increase annual electricity usage by 32 percent by 2030. This combination of surging demand and constrained supply will further increase prices. And homeowners and renters may suffer the most, as these groups have experienced the largest price increases in recent years compared to commercial and industrial users.

These affordability concerns and rising demand are pressuring legislators, regulators, and utilities to act — and many are turning to traditional approaches. Utilities like the Tennessee Valley Authority are proposing large, new natural gas facilities. Large-scale projects can benefit from economies of scale, but they also create financial and reliability risks that, all too often, end up hurting consumers in the long run. Just as investors balance risk and reward by building portfolios of stocks, we should pursue diverse energy strategies.

Portfolios of small, local investments — such as energy efficiency, batteries, renewable energy, and flexible resources such as virtual power plants — offer an alternative means to meet growing electricity demand without compounding risk. By leveraging these technologies, we can create an energy system that is more diverse, more resilient to financial and operational shocks, more affordable, and cleaner.

Putting all your eggs in one basket is risky

A utility’s typical response to serving new load is to build centralized, fossil-fuel generation, including natural gas turbines. Utilities like these facilities because they are familiar and can be turned on when you need them (i.e., they are “dispatchable”). Further, many utilities are allowed to bill ratepayers more when they invest in new capital assets, which incentivizes them to build centralized generation.

However, building large, homogenous generation fleets places several risks on consumers:

• Overbuilding: When a utility builds a large plant, it is making a big, long-term bet. The utility spends lots of money in the hopes that there will be sufficient future electricity demand to justify the expense. Yet utilities routinely overestimate demand growth, on average by 17 percent. Customers and investors are then left footing the bill for underutilized plants. For example, during the Dot Com bubble, utilities built a fleet of gas plants to meet expected future demand. However, electricity usage fizzled after the bubble burst, leaving customers paying for plants they didn’t need. The same issue can occur for renewables projects. The City of Georgetown, TX, contracted for significant volumes of wind energy, expecting future growth that never arrived. As a result, the city was left with excess electricity that it had to sell at a loss.
• Market shifts: Another challenge with large, long-term bets is that energy markets can change dramatically over decades. For example, when communities in Illinois committed to building a new coal plant at Prairie State Campus in 2007, the project looked like a decent investment. However, by the time the plant was finished, innovations in fracking technology had made natural gas far cheaper. As a result, RMI analysis found that these communities paid at least $390 million extra for their electricity over four years.
• Fuel price risk: Reliance on fossil fuels can expose customers to more volatile prices. Between 2020 and 2023, electricity customers in Florida saw their monthly fuel charge double from ~$20 to $40. Today, natural gas prices are again rising and increasing costs for consumers around the country.
• Shared disruptions: Non-diverse energy systems are also less resilient because they share common points of failure. In 2021, many communities in Texas lost power during Winter Storm Uri when natural gas generators and pipelines across the state froze. Other regions, such as New England, are also vulnerable to polar vortexes due to their reliance on natural gas. In fact, the North American Reliability Corporation (NERC) flagged the United States’s growing usage of natural gas as a national reliability risk.

Many of these risks are becoming more acute as surging electricity demand, increasingly volatile weather, a dynamic policy landscape, growing geopolitical risk (which can impact fuel prices), and rapid technological innovation increase future uncertainty.

Diversification is a powerful risk reduction strategy

Investing in a diverse set of energy solutions can mitigate these risks and create a more financially and operationally resilient system. This diversity can take several forms:

• Diverse types of generation limit common points of failure and fuel price risk: Generating electricity from a variety of types of facilities increases resilience to extreme weather by reducing common points of failure. For example, it was the City of Springfield’s “balanced portfolio” of renewables and traditional resources that allowed it to successfully weather a severe winter storm. A diverse generation fleet also reduces fuel price risk by dampening the impact of market shifts in any one commodity (e.g., increases in natural gas prices).
• Diverse generation locations protect against localized disruptions: Varying the geographic location of generators can limit the risk that all of them will be impacted by a single event (e.g., a wildfire).
• Staggering contract timing protects against buying when prices are high: Just as investors use techniques such as dollar cost averaging to manage market volatility, building an energy system incrementally over time limits the risk of any one transaction losing a lot of money. Further, staggering purchases provides more regular opportunities to adjust over time as electricity needs and market prices fluctuate.
• Diversifying technology size balances economies of scale with nimbleness: Leveraging smaller, fast-to-deploy solutions can limit the risks of overbuilding to meet anticipated demand. Investments in energy efficiency, batteries, demand response, and flexible resources such as virtual power plants have the potential to be deployed in months rather than years. As a result, instead of making bets years in advance, we can deploy these solutions over time as demand evolves. These local solutions can also significantly reduce costs for consumers. For example, in 2024, ComEd provided residents and businesses with $277 million to reduce electricity waste. As a result, customers will save an estimated $3.2 billion, a more than tenfold return. Similarly, virtual power plants (VPPs), which leverage large numbers of devices to reduce demand at critical times, can provide the same services as a new gas plant at 40-60 percent of the cost.

Case Study: Burlington, VT

These ideas are not just nice theories — communities are putting them into action. Consider the case of Burlington, Vermont. Over the years, Burlington has:

• Reduced residential electricity usage and peaks: Through a dedicated energy efficiency utility, Burlington has consistently made investments to slash waste and reduce homeowner bills. Since the program’s inception, the City’s investments have reduced annual residential energy use by 59,204 MWh — enough to power over 5500 typical Northeastern homes or a bit less than one-third of Burlington’s households. These waste reduction efforts not only reduce homeowner energy costs but also help minimize the utility’s maximum load on any individual day (particularly when combined with the recently launched flexibility programs). Since the electric grid must be sized to meet a community’s highest demand throughout the year, these efforts provide an elegant means to delay or even avoid costly new infrastructure investments.
• Kept bills low and stable: Burlington generates its power from a variety of sources, including biomass facilities, hydro, wind, solar, and oil. This diversity has protected its customers from price volatility and enabled it to retain lower rates. In contrast, Eversource customers in neighboring New Hampshire have been exposed to fluctuating natural gas prices, and experienced higher, more volatile bills. (See Exhibit 1). Importantly, this analysis assumes comparable electricity usage across households, but in reality, Burlington residential users consume 34 percent less than the average in New England, at least in part due to the city’s long-standing energy efficiency efforts. As a result, a typical Burlington homeowner’s actual bills would likely be even lower than what is represented here.

Exhibit 1: Burlington Electric Department’s and Eversource’s average monthly residential bills over time. 

We can have a less risky, more reliable system

A more diverse, distributed, resilient energy system is possible — but it won’t happen on its own. While state policy makers and regulators can play a critical role in passing policies and regulations to support this adjustment, local governments and communities can adopt policies that help streamline local installations (e.g., permitting reforms).

We also need to collectively rethink how we evaluate investments. Too often today, individual energy projects are evaluated in isolation, where perceived risks about cost effectiveness can delay or cancel projects. This narrow lens too often causes us to overlook the risks we are already exposed to and undervalue the benefits of diversification. To be fair, there will be times when the cost savings from distributed energy resources may be uncertain or, at the end of the day, not realized. Yet communities that take a holistic lens to their investment decisions will be rewarded with a more financially and operationally resilient system.

In today’s uncertain environment, customers need affordable, reliable electricity — without more risk. Portfolios that leverage distributed, local solutions to complement centralized approaches might be just what they need.