Energy costs of the US economy: small but rapidly changing

Energy infrastructure is a key component of the modern economy — it enables getting us from point A to point B (transportation), manufacturing the myriad consumer products (industrial), keeping the lights on (electricity) and powering the internet and data driven technological revolution. The United States spent $1.2 trillion on energy, which is 5.7% of its Gross Domestic Product (GDP), in 2019 per EIA data. Incidentally, another vital sector of the economy — food and agriculture, contributed a comparable $1.1 trillion to the US GDP.

Some players in the industry frequently tout electricity as the “first 5 percent of the American economy” as it largely supports the rest of the economy. Recent failures in energy infrastructure such as brown outs in Texas (polar vortex) and California (heat waves) highlight the critical nature of the sector.

Of the $1.2 trillion, $0.3 trillion (1.5% of GDP) was contributed by the electric power industry sector. The average volumetric electricity rate is 10.42 cents per kWh. Based on data published by EIA, this is roughly split into:

• Generation: 5.8 cents per kWh (55%)
• Distribution: 3.3 cents per kWh (31%)
• Transmission: 1.4 cents per kWh (13%)

Therefore, the US roughly spends $160 billion every year in building and operating its generation fleet, $90 billion in maintaining and expanding the distribution grid, and $40 billion in maintaining the high voltage transmission grid. As the United States is transitioning to a cleaner electric grid to combat climate change, the generation grid in particular will undergo a major transformation. The steep learning curves on renewable generation have long made them economically competitive and energy storage is likely to follow suit. Squeezing the last bit of emissions while maintaining a reliable grid at all times would likely require new technologies that can provide cheap reliable power at scale. Power generation from hydrogen, thermal plants with carbon capture, and ultralong duration storage technologies seem the most promising today. The generation fleet transformation would likely increase the costs of generation in the long run.

Demand-side technologies provide another avenue for transforming the power system. Customer-sited generation technologies like rooftop solar, fuel cell based generation, and microturbines enable customers to achieve cost savings compared to electricity from the utility, and in some cases even allow them to disconnect from the grid completely. Integrating large quantities of demand-side generation would require a significant revamp of the distribution grid increasing its share of the total retail rate in the future.

Given the complex requirements of the various components of the power system, startup companies that are leading the clean energy transition and disrupting the sector have two pathways — compete directly with the traditional monopoly utilities and the services they offer, or focus on niche solutions and products that can partner with incumbent utilities. It is an exciting time to be involved in the energy space, or even spectate from the sidelines.