When it comes to electricity prices, many factors affect your rates. Knowing the major factors can help you better understand what you are paying for and how to manage your energy costs, whether a small business or a large corporation.
Electricity prices are affected by several factors, including power plant costs, fuels and grid infrastructure. They also can be impacted by world events such as weather and climate change.
Supply
Energy prices fluctuate based on supply and demand. Prices increase when supply is insufficient to meet demand. Likewise, when supply is lower than demand, prices tend to fall.
The supply side of the equation refers to the amount of power available for consumer use. Power plant costs, transmission and distribution system costs, and energy regulations influence this.
Fuel costs are one of the biggest influences on residential electricity rates. Natural gas prices and the cost of other fuels used by power plants are essential considerations.
Power plant fuel costs vary from state to state and are also affected by regional factors such as hot and cold weather. Extreme hot or cold temperatures will cause a rise in energy consumption, increasing fuel costs for power plants.
Other factors that affect electricity prices include global events and climate change. These can disrupt power production and distribution, limiting the amount of power available to consumers.
Lastly, the supply side of the equation is also affected by market deregulation. When there is an open competition, the price of energy can fall. Take, for instance, electric rates in Ohio. You can get your electricity from a competitive retail electricity provider if you live in Ohio. Residents of Ohio benefited from supplier competition, and lower energy prices after Ohio’s utilities were deregulated in the early 2000s.
Demand
Electricity is a highly volatile product because demand varies cyclically with the time of day and season. Moreover, it has few substitutes, and the marginal cost of generating and delivering electricity is a complex function of generation and transmission costs and system reliability.
Hence, the demand side of the equation is an important one. It can help determine how much electricity to purchase and influence the product’s price.
Many factors affect the demand for a product, including commodity price, consumer income, substitute availability, consumer preference, and the expectations of customers. This demand also affects the supply of products, business operations and profitability.
A customer’s electricity usage can be changed in response to price changes through various incentives. These can include real-time pricing (RTP), direct load control, and interruptible/curtailable (I/C) programs.
These types of incentives are mainly offered to large industrial or commercial customers. They provide a rate discount or bill credit for agreeing to curtail load during system contingencies.
Several ISOs/RTOs have developed emergency programs that link payment for load reductions to real-time market prices (in regions with organized wholesale markets) or values that reflect a customer’s outage cost or the value of the lost load. These programs have proven effective for both customers and grid operators, but there are many barriers to participation.
Transmission
The transmission side of the electricity equation is where the real power comes from, and it plays a big part in your company’s energy budget. It involves the overhead wires transporting electricity across long distances and the distribution wires, which distribute electricity locally.
Building new transmission lines depends on the type and length of lines and their location, and it is only possible to estimate some of the costs associated with these projects. The PJM, MISO and other regional grid operators (RTOs) that control the movement of wholesale power oversee all transmission planning. At the same time, federal regulators such as the Federal Energy Regulatory Commission (FERC) regulate transmission costs at the utility level.
Much of your business’s electricity price is based on the cost of building new transmission lines. You must understand how this cost affects your company’s electricity budget.
Several factors can create congestion on the transmission grid, including economic trends and changes in the local weather. Congestion can lead to higher prices because it limits the flow of low-cost electricity.
This effect is called congestion pricing, and regional grid operators such as ERCOT make it clear what the impact of congestion will be for your business. You can check your power price by going to a site where you can see the congestion rate for your area.
Distribution
The power grid is a complex system that requires constant coordination to ensure power supplies and demand levels balance each other. This is not always easy to do, significantly if climate change, world events, or other factors disrupt the ability to add new generations and transmission to the grid simultaneously as demand grows.
The distribution side of the equation has a significant influence on prices as well. Electricity prices are set on the wholesale market, where generators submit selling bids equal to their marginal cost of generating a certain amount of energy. Distributors (typically utilities) submit buying bids representing their total demand for that same amount of electricity.
State-level utility commissions then regulate these rates. They often account for a substantial portion of your bill.
A key consideration in these prices is distribution capacity utilization, which measures how much energy the power system can safely deliver to end users. This factor affects the cost of providing power and is influenced by the type and size of consumers included in a plan.
The distribution system is also subject to losses that can impact the price of electricity, such as line faults. These can cause significant damage to the system, affecting the quality of power delivered and the grid’s reliability as a whole.
