Electricity Prices

Coal is often viewed as a key to economic development in Kentucky—not only for the jobs it creates, but also because of the low electricity rates it provides. Kentucky has had some of the cheapest electricity in the nation, making it more attractive to industries considering locating in the state. Because the cost of electricity is one factor in attracting outside industry, policy-makers and industry representatives often argue that cheap electricity will translate into better economic development and (ultimately) economic prosperity. In Kentucky, low prices help attract energy-intensive industries to the state, from aluminum smelters in western Kentucky to automotive plants in central Kentucky.

Electricity prices, however, do not appear to be correlated with a higher standard of living. Indeed, states with the lowest electricity prices also have some of the lowest per capita income rates in the nation (see Figure 10). While electricity prices are not the underlying cause for these disparities, the correlation between low energy rates and low per capita income suggests that low energy prices do not produce significant long-term economic development results. Moreover, historically low-cost electricity has led to underinvestment in energy efficiency in Kentucky. Kentucky ranks third among states in per customer electricity use, and Kentucky’s residential sector is 24 percent more energy intensive than the national average.5 So while the Commonwealth’s electricity rates are low, its electricity bills are not.

Figure 10: Electricity Costs and Per Capita Income

Cheap electricity will not last forever — even in Kentucky. As global demand for coal rises, electricity prices also rise. This trend started to take hold in 2000 though the global recession disrupted the trend over the last two years (see Figure 11). Electricity prices are expected to continue to rise considerably as utilities face increasing regulations on carbon and other emissions. A 2007 report from the Kentucky Department of Energy Development and Independence notes: “The economic impact of a carbon-controlled future on the state of Kentucky could be significant… Any legislation that adds costs to coal-fired electricity generation that are not also levied against other forms of generation would raise Kentucky’s rates disproportionately compared with states having other resources and would thus lessen the differential in cost of electricity that Kentucky currently enjoys with respect to other states.”6

Figure 11: Average Retail Electricity Price

Another reason Kentucky’s electricity prices are low is that the state is primarily dependent on aging coal-fired power plants, the capital costs of which have already been paid. The average coal-fired power plant in Kentucky is 43 years old.7 The need for new electricity generating capacity in future years will mean new capital costs that will raise electricity prices, whether the new capacity is for coal or other energy sources.

The coal industry’s impact on jobs in Kentucky is mixed. On one hand, coal provides good jobs in a region where well-paying jobs are scarce. On the other hand, mining communities have become so dependent on coal that they are vulnerable to even small swings in the industry. This creates a dilemma regarding how to achieve long-term stability. In a recent study of a full boom and bust cycle (1970’s-1980’s) in the Central Appalachian coal industry, Black et al found that job, income and population losses during the coal bust were greater than gains in these areas during the coal boom. Their findings suggest that the availability of jobs in the industry helped retain “prime-aged” men and spurred some return migration during the boom period; however this population declined with greater intensity during the bust period. They hypothesize that the decline in this population during the bust period may be related to the up-skilling of the labor force and the rise in income during the boom period, leading to greater mobility and employability outside the region.8 Perhaps in part because of this trend, mines in the Central Appalachian region face labor shortages as older workers retire and much of the younger generation moves out of the area to pursue other opportunities.9 Given its centrality to eastern Kentucky in particular, the coal industry will continue to be a player in the region’s economic development efforts in the short term. In the long term, as the industry continues to decline, its role in economic development is likely to diminish considerably.

 

5. Governor’s Office of Energy Policy. 2008. “Kentucky Energy Watch Special Edition: Electricity in Kentucky.” Retrieved May 27, 2009 (http://www.energy.ky.gov/NR/rdonlyres/6BD66312-4950-4312-AAF7-263E70A58A4A/0/SpecialEditionElectric12008.pdf).

6. Kentucky Department for Energy Development and Independence. 2008. Carbon Management Report. Retrieved March 20, 2009 (http://www.energy.ky.gov/NR/rdonlyres/DCA3F2AF-F208-4EB4-9C1E-890BE19CEE12/0/CarbonManagementReport.pdf).

7. National Energy Technology Laboratory. 2007. Coal Plant Database. Retrieved May 12, 2009 (http://www.netl.doe.gov/energy-analyses/technology.html)

8. Black, Dan, Terra McKinnish and Seth Sanders. 2005. “The Economic Impact of the Coal Boom and Bust.” The Economic Journal, 115: pp. 469, 473.

9. Gaynor, Pamela. 2005. “Coal Companies Go Mining for Workers.” Pittsburgh Post-Gazette, July 7. Retrieved March 20, 2009 (http://www.post-gazette.com/pg/05188/533961.stm).