Electricity affordability at a crossroads

This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.

Energy affordability is a frequent focus of policymakers, but this consideration grew in prominence over 2025, particularly in regions experiencing the most acute rate increases. The combination of increased electrification of the global economy, rising demand from data centers, resource adequacy and grid reliability considerations, volatile commodity prices, higher interest rates, and cost inflation, among other things, has heightened concerns about energy affordability and economic competitiveness. With these factors showing no signs of abating, the topic of affordability will remain prevalent among policymakers, consumers and utilities in the year ahead.

Electricity affordability has emerged as a key concern in the US over the past year, as projections for data center demand growth put recent rate increases under the spotlight. Data released by the US Bureau of Labor Statistics indicated that while the general consumer price index rose by 2.7% over 2025, the index for electricity surged by 6.7%, a reversal from recent history in which electricity rates have lagged broader inflation. This sharp rise in electricity prices has elevated affordability as a top policy issue for 2026 in the US, where power consumption per household ranks among the highest in the world. At the corporate level, mentions of affordability on utility-sector earnings calls, once barely noteworthy, occur at roughly 10 times the frequency they did five years ago. In the political arena, rising electricity prices, already a key topic in gubernatorial races in Virginia and New Jersey in November 2025, are expected to remain a theme in federal, state and local-level elections later in 2026.

With affordability now in focus, the rapid growth in data centers and massive power sector investment required to support these new electricity loads are increasingly a concern. S&P Global Energy anticipates that capacity additions will average 71 gigawatts/year from 2026 to 2035, a significant increase compared with the 43 GW/year observed from 2016 to 2025. This growth is being driven by a rise in net on-grid demand, which is expected to increase from 0.8%/year over the last decade to 2%/year during the next decade. Yet consumers and policymakers are eager to avoid utility investments intended to support new load growth, exacerbating upward price pressures. The issue is complicated by the often-misunderstood drivers of recent electricity price increases, which, in most cases, do not relate to data centers. Retail electricity rates are a product of complex ratemaking and reflect multiple drivers, many of which vary regionally. The largest increases in retail electricity prices over the past five years were concentrated in California, the mid-Atlantic and New England, but the major drivers across these three regions varied considerably.

Even though customer electric bills as a percentage of household income remain relatively low compared with the recent past, in an environment where budgets are being pressured from all sides, rising rates are fast becoming an important campaign issue at the state, local and federal levels. US states such as New Jersey and Connecticut have delayed or reduced renewable energy requirements to help soften rate pressures. PJM’s push to cap capacity market prices resulted in a reserve margin below its target. We expect regulators to manage rate growth by carefully reviewing utility proposals. In anticipation, utilities are emphasizing meeting new demand while limiting rate growth, and many data center developers have pledged to independently procure their full supply requirements and provide greater planning transparency, recognizing the risk that the affordability challenge poses to their industry.

Following the rise in power prices, electricity consumption across Europe declined, illustrating the significant influence of pricing on usage patterns. In 2025, the total average load remained 6% below precrisis levels, according to S&P Global Energy. In the residential sector, despite substantial government efforts to promote the electrification of heating and shield domestic users from rising bills during the energy crisis, electricity consumption per household fell by 3% from 2015–20 to 2024 as retail prices nearly doubled.

As Europe’s decarbonization pathway requires widespread electrification of the economy — amid mounting consumer pressure — retail power prices have become a central focus of recent energy policies. The persistence of elevated retail prices has prompted several member states to shift certain environmental levies from ratepayers to taxpayers to ease burdens.

Germany eliminated its renewable support surcharge from retail bills in 2022 amid the energy crisis. Similarly, the UK decided in 2025 to shift certain renewable support costs from electricity bills to general taxation.

In parallel, concerns over Europe’s industrial global competitiveness have led most member states to introduce preferential rates for large power users. For example, in November 2025, the German energy minister confirmed a new industrial price support mechanism aimed at reducing the burden of high electricity prices on the country’s industrial consumers.

Yet fiscal constraints loom large. Countries with high public deficits cannot indefinitely subsidize power prices without cutting other spending or raising taxes. In addition, announced power expansion and decarbonization plans will be capital-intensive and require some level of state support to de-risk projects and minimize financing costs, especially for nuclear. Some governments have started to consider reallocating taxes from electricity to higher-emitting fuels to limit the strain on their budgets, but this may spark backlash.

Affordability has long shaped electricity policy in South Asia, where governments have relied heavily on subsidies to keep power accessible for consumers, especially households and the agriculture sector. According to a recent study on India by the International Institute for Sustainable Development, electricity-related subsidies reached $46 billion in fiscal year 2024, or 1.3% of India’s GDP, equivalent to about 3.5 US cents/kWh consumed in the country, roughly one-third of the average 10 cents/kWh cost of supply. This level of support suppresses true price signals and discourages investment in emerging or higher-cost generation technologies, reinforcing dependence on legacy fuels. Yet, despite end-user prices (after subsidies) being less than 50% of US tariffs, consumption per household remains 10 times lower. This stark contrast is primarily due to significantly lower income levels.

Cross-subsidy regimes amplify these distortions. Commercial and industrial consumers are charged higher tariffs to subsidize residential and agricultural users, weakening industrial competitiveness and prompting businesses to seek power alternatives outside the grid.

Utilities, meanwhile, face their own affordability constraints. Serving subsidized consumers often requires procuring expensive LNG- or oil-based power, which many utilities avoid by resorting to involuntary loadshedding. These economics also limit incentives to expand distribution networks into low-revenue or remote areas, shaping long-term demand patterns and grid reach.

Affordability pressures are even more acute in Pakistan and Bangladesh, where rising global fuel prices, heavy reliance on imported energy, currency depreciation and International Monetary Fund-driven subsidy cuts have pushed tariffs higher and strained power sector finances. In Pakistan, these pressures have directly contributed to steep retail tariff increases; coupled with frequent power cuts, they have driven households and industrial consumers toward off-grid solar photovoltaic systems. The shift was accelerated by sharply falling Chinese solar panel prices: Pakistan imported 17 GW of solar panels in 2024, reflecting a structural move toward consumer-driven energy security. To alleviate the burden on households, the government recently introduced a captive power levy on industrial consumers, redirecting revenue from captive generators to reduce residential tariffs.

In Bangladesh, similar affordability dynamics — combined with political sensitivities ahead of the February 2026 elections — have intensified pressure for tariff reform and reduced exposure to volatile international fuel markets. Pakistan and Bangladesh are prioritizing domestic energy resources to stabilize electricity costs. Pakistan is rapidly shifting from imported to domestic Thar coal, cutting fuel costs by more than half, while Bangladesh plans to reduce its LNG imports by expanding its domestic gas production.

Unlike the US and EU — where a larger share of fuel, grid and policy costs tends to flow through to consumers via regulated cost recovery and market-based pricing — China manages affordability through administrative sequencing of costs, price oversight and a mix of direct and indirect support tools.

China keeps consumer bills steady by shouldering up-front capital expenditure and recovering it gradually via multiyear T&D price controls. The 2023–25 cycle also unbundles pumped‑storage capacity and ancillary‑service charges from grid tariffs to avoid abrupt retail shocks while funding grid build‑out. It backs capital‑heavy plants with capacity payments and supports domestic fuel exploration and mining to keep generator input costs in check. This approach has delivered broadly stable retail tariffs since 2020, even as the system expands.

In the past few years, China’s power policy has shifted from pure affordability to a dual focus on affordability and decarbonization, with reforms accelerating from 2023. The policy agenda is to keep expanding renewables, add storage and other flexibility, and update market rules while maintaining reliability and stable retail prices. The trade-off is muted scarcity pricing and a greater reliance on administrative balancing, with a larger share of cost recovery pushed to commercial and industrial users while households and agriculture remain more shielded.

Electricity affordability has surged to the forefront of global energy policy, as rising — or persistently elevated — retail prices now threaten the pace of electrification, digital infrastructure expansion and decarbonization ambitions worldwide. Governments face mounting pressure to respond through measures such as shifting levies from household consumers to taxpayers or other end-users, reforming tariffs, adjusting supply expansion plans, or cutting other public spending. However, fiscal constraints, mounting public debt and political backlash make these interventions increasingly fraught and difficult to sustain. The underlying drivers of price increases — volatile commodity costs, grid investment backlogs, capacity-market tightness, legacy renewable surcharges and regional-specific factors such as wildfire liabilities or LNG dependence — remain diverse, meaning regulatory responses will likely stay fragmented across jurisdictions. This fragmentation risks perpetuating an uneven competitive landscape, distorting investment signals, delaying the construction of critical infrastructure and ultimately slowing progress toward a reliable, low-carbon electricity future.