Low-Energy Fridays: Your electric bill is hiding something

When gas prices spike rapidly at every pump in town, boldly displayed for all to see, drivers can adjust their use immediately. But when electricity costs surge, utilities keep charging the same flat rate—giving consumers no opportunity or motive to avoid the higher expense. While this obscure pricing system stems from an ancient regulatory model that keeps consumers in the dark ages, smart meters, modern thermostats, and other new appliances are practically begging for the chance to save us money.

Electricity production costs can vary dramatically within a single day. On hot summer afternoons, when everyone’s air conditioner is running, utilities fire up expensive “peaker” plants that might run just a few days a year. These inefficient plants dramatically drive up costs, and consumers ultimately pay for them—just not in a way that’s visible or controllable.

Here’s the crucial point: Those sky-high costs don’t disappear with flat rates, they’re simply averaged into our bills throughout the year. Even if people reduce their electricity use during expensive peak hours, they’ll pay the same rate as those who max out their air conditioning. In areas where utilities have state-protected monopolies, the utility pays whatever it costs to generate or purchase power, knowing it can recover all costs from “captive customers”—those who live within the monopoly’s assigned territory. When prices spike, the utility passes those costs on to everyone while hiding the price signals that could help avoid those spikes.

The current system creates perverse incentives for utility companies with little financial motivation to help consumers shift their usage away from expensive peak periods. Under current regulations, utilities recover their costs no matter what—and many states offer a guaranteed return on investment in those rarely used peaker plants. These incentives may explain why utility-run energy efficiency programs do not seem to save much energy. Meanwhile, consumers lack the information and incentives to change behavior that could save everyone money.

Our current approach also creates enormous economic waste. We build extra power plants, transmission lines, and distribution equipment sized for peak demand but underused most of the time. It’s like building a 10-lane highway that only fills all lanes during rush hour—except we’re all chipping in for those lanes whether we drive during rush hour or not.

Digital technologies now make transparent and dynamic pricing possible, even while helping customers pay less for power overall. Smart thermostats, water heaters, electric vehicle (EV) chargers, and home batteries could automatically adjust to price signals, saving consumers money without inconvenience. Studies show that dynamic pricing can save consumers 10 to 15 percent on their electric bills while helping reduce overall system costs.

Competitive retail markets allow innovative pricing, and the results are impressive. In Texas, suppliers offer consumers variable rates and energy management options that can cut bills by 20 percent or more while providing protection against extreme price spikes. Consumers can program their smart thermostats, EV chargers, and other devices to respond to price changes, allowing them to save money without constantly monitoring electricity prices. This market-based approach gives consumers control over their energy costs and protects them from extreme price volatility.

Consumers can also get boring old flat rates from suppliers in Texas’ competitive retail electric market if that’s what they want. The competitive structure of the market means that no one is forced to pay more for electricity when someone else maxes out their air conditioning all summer.

Unfortunately, in too many states, regulatory policy blocks this kind of consumer empowerment. Outdated regulations trap consumers in a one-size-fits-all pricing model, leaving them with unnecessarily high bills and no alternatives to reduce them.

A new report from the American Enterprise Institute diagnoses the many barriers to a more efficient, consumer-oriented electricity system. It emphasizes that democratizing energy decisions—giving consumers more control over their energy use and costs—is essential to build a more dependable, affordable, and decarbonized grid. The report identifies problems, outlines reforms, and guides regulators and policymakers seeking a more innovative, consumer-focused system.

It’s time to pull back the curtain on electricity pricing. The technology to create a transparent, consumer-friendly electricity system exists today—we just need the regulatory frameworks to catch up. Change is necessary, and concrete policy reforms are needed to give consumers control over their energy costs while making the entire system more reliable and affordable.