Revisiting the relationship between demand growth and electricity prices

Electricity demand from commercial and industrial (C&I) customers is rising in the United States, with projections for future demand growth from datacenters. Increasing C&I demand has been linked to rising electricity prices, and several analyses project datacenter demand growth to fuel future price increases. The notion that demand growth increases electricity prices is often framed as a foregone conclusion, especially in mass media coverage of the issue. However, the cost structure of the electricity industry implies that demand growth can reduce prices under certain conditions, a relationship that continues to be supported by empirical evidence.

In this commentary, we aim to clarify the relationship between electricity demand and prices in the short and long terms. We outline three dimensions that shape this relationship: system capacity utilization, system expansion costs, and cost allocation in the rate design process. We explain why demand growth has historically been largely associated with falling electricity prices and explore arguments that future C&I demand growth may increase prices.