Electricity prices have surged over the past year, nearly doubling the overall inflation rate due to rising demand and increased investment in aging grid infrastructure.
Prices rose 4.5% in May on an annual basis, according to the Bureau of Labor Statistics’ consumer price index (CPI), a broad measure of the cost of everyday goods like gasoline, groceries and rent. The overall inflation rate for all goods and services in May was 2.4%.
The demand for electricity is reaching an all-time record high, according to Phil Flynn, senior energy analyst at The Price Futures Group and a FOX Business contributor.
That was the case even before the first major heat wave of the season brought some of the hottest temperatures seen in a century to cities across the Northeast on Monday, driving a surge in air conditioner use, further spiking electricity demand. Flynn said that despite improvements in air conditioner efficiency, “the overall impact on electricity usage remains substantial but necessary for health benefits.”
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Dangerously hot conditions are expected to persist too, with the National Weather Service office in New York warning on Monday that heat index values of up to 110 degrees are expected in portions of southern Connecticut, northeast New Jersey and southeast New York.
The National Weather Service office in Chicago posted on X on Tuesday that heat indices may continue to exceed 100 degrees in the region.
The rapid increase in electricity demand is also largely driven by data centers that are necessary for training, deploying and running artifical intelligence models, according to Flynn and Rob Thummel, senior portfolio manager at Tortoise Capital.
Thummel told FOX Business that the data centers have massive computing power that perform the tasks required for AI applications to function, but they rely on energy infrastructure to generate, transmit and distribute electricity.
The increased investment by the hyperscalers who are building larger data centers combined with increased computing power is contributing to higher electricity demand after decades of stagnant electricity demand, according to Thummel.
Flynn said that data center electricity consumption has tripled to 176 terawatt hours in the past decade and may double or triple again within three years.
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The Internation Energy Agency projects that the U.S. economy will consume more electricity in 2030 for processing data than for manufacturing all energy-intensive goods combined, including aluminum, steel, cement and chemicals, in large part because of artifical intelligence usage.
Another factor driving up costs for consumers is capital investment in electric infrastructure, according to the Energy Information Administration (EIA).
Those investments more than doubled between 2003 and 2023 due to a combination of factors, including replacing and upgrading the aging generation and delivery infrastructure to resist fire and storm damage, as well as utilities installing the first natural gas-fired generation, then wind and solar generation and battery storage. New lines were connected to renewable resources and new technology, such as smart meters, sensors and automated controls, was added to the system, which added to the costs.
The issue is that the current demand is outpacing the nation’s supply capabilities, which is only “exacerbating issues with our aging infrastructure and power generation methods,” according to Flynn, who added that private industries are now moving into private power generation to meet their needs, which is requiring more infrastructure investment.
Thummel said the “U.S. electricity grid is in need of investment to modernize to maintain reliability as well as expand in anticipation of higher demand” and that “increasing the use of lower cost, higher efficiency natural gas to generate electricity can assist in keeping consumer cost increases manageable.”
Fixing the grid, however, “is going to be the greatest challenge for our economy going forward,” according to Flynn.
“We have to increase the capacity of electricity so we can be the leader in the technologies that are going to drive the economy of the future, which are artificial intelligence data centers and the like,” he said.
