The Falling Cost of Electricity, Jevons Paradox, and Energy Poverty
BLOG POST | OCTOBER 30, 2019
By: Emery Wolf, TEPRI Research Analyst
While the price of electricity is something most of us think about occasionally, looking forward to predict electricity prices of the future is something that is difficult to contemplate. Costs of electricity have fallen dramatically since the late 19th century, and with this, an increase in energy consumption. Per capita electricity consumption has increased substantially faster than prices have fallen — a trend that coexists with an increased number of appliances, larger homes, and a more electrified world. However, this trend of increasing consumption has not been true since around 2008, which may indicate a shift in macro consumption behavior. Falling costs could be beneficial for low-income households, over 900,000 extremely low-income households in Texas rely primarily on electricity with an average energy burden of 13% of their household income going to home energy costs (1).
At the beginning of our electrified world, the cost of electricity was high. Adjusted to 2019 prices, a kWh in 1892 cost over $7.00 according to the Smithsonian Institute. By 1907, the cost had fallen drastically, to around $1.50 (2).
Publicly available data from the Energy Information Administration (EIA) goes as far back as 1960, where the real price per kWh dropped to under 15 cents (figure 1). While this inflation-adjusted price has decreased, the nominal (non-adjusted price) has continued to increase along with the prices of other commodities. Although the trend has ebbed and flowed over the decades, the trend over the past 50 years is clear — total electricity prices have decreased over time; the average cost of electricity today is around ⅔ of the price in 1960. Continually falling renewable energy costs, as well as low natural gas costssuggest that this trend may continue. However, with a rapidly evolving electricity sector, the past pattern of electricity costs may not accurately represent the future.
Figure 1. A comparison of the average nominal prices of residential electricity and real (inflation-adjusted) prices in the United States, with trendlines (5).
As resources become more affordable, people tend to consume even more than was saved due to improved technologies. This is the phenomenon of Jevons Paradox. William Jevons first documented this insight during the industrial revolution in England. As Jevons saw new technologies making coal consumption more efficient, people consumed even more coal than before. This environmental economics paradox is a common pitfall of efficiency gains and has been observed in other instances, such as increasing fuel economy of automobiles resulting in more fuel consumed (4).
The annual per capita electricity consumed in the U.S. increased from around 4,000 kWh in 1960, to near 13,500 kWh in the late 2000s, without any substantial growth since 2000 (figure 2). Over these 50+ years, the thermal efficiency of fossil fuel plants increased from around 40% to near 90%. Jevons Paradox holds true since 1960 — as efficiency increases, consumption has more than made up that difference to offset the gains in efficiency.
Figure 2. Per capita electricity consumption in the U.S. Data from the World Bank (6).
The increasing electricity consumption has caused the real (inflation-adjusted) annual expenses of per capita electricity to increase overall, from less than $600 in the early 1960s to a peak of $1,400 in 2008. However, I suspect this may be changing.
While the per capita electricity consumption may be plateauing (figure 2), this trend will likely not occur in low-income households. Many very-low income households in Texas, and beyond, are in a state of energy poverty where the cost of consuming enough energy to meet their essential household energy needs is too high. This topic is complex; however, if retail electricity prices continue to fall, and very-low income households maintain the same energy expenses with increased consumption, I suspect that there would be fewer people in a state of energy poverty. The increased electricity consumption would result in a state of increased well-being for families who can finally meet their essential energy needs.