The True Costs of Electricity Generation in the US



Source: The True Costs of Alternative Energy Sources: Are We Unfairly Penalizing Natural Gas?; Michael Greenstone, Professor of Environmental Economics at the Massachusetts Institute of Technology


The current energy playing field is tilted because our individual energy choices are based solely on the visible costs that appear on electric bills and at the gas pump. This system masks the full or social costs arising from those energy choices.

The social cost of energy includes the price we pay at the gas pump—known as the “private costs”—plus the less obvious impact of energy use on health, the environment, and national security. Economists refer to these additional damages as negative externalities, or “external costs.”

The dramatic differences in the private and social costs of different energy sources—seen in the chart above, which adds on the external costs associated with each electricity source—illustrate how the low-private-cost energy sources on which we rely often come with high external costs.

Specifically, the social cost per kilowatt hour of energy for existing coal plants is more than double the private cost—8.8 cents compared to 3.2 cents. In contrast, the private costs of a kwh of electricity from a new natural gas plant is 4.1 cents and the full or social costs is 5.2 cents.

Once the social costs of all energy sources are accounted for, natural gas power plants stand out as the least expensive electricity source today. This outcome reflects the low prices of natural gas due to the recent dramatic increase in reserves and the fact that the health and environmental costs associated with natural gas are lower than for other fossil fuels.