Electricity Explained: Factors Affecting Electricity Prices

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Many factors impact electricity prices

Electricity prices generally reflect the costs to build, finance, maintain, and operate power plants and the electricity grid (the complex system of power transmission and distribution lines). Some for-profit utilities also include a return for owners and shareholders in their prices.

There are several key factors that affect the price of electricity:

  • Fuels—Fuel costs can vary based on the per unit cost, such as dollars per ton for coal or thousand cubic feet for natural gas, and the relative cost, in dollars per million Btu equivalent. Electricity generators with relatively high fuel costs tend to be used most during periods of high demand.
  • Power plants—Each power plant has construction, maintenance, and operating costs.
  • Transmission and distribution system—Maintaining and using the transmission system to deliver electricity contributes to the cost of electricity.
  • Weather conditions—Rain and snow can provide water for low-cost hydropower generation. Extreme temperatures can increase the demand for electricity, especially for cooling. Severe weather can also damage power lines and add costs to maintain the electricity grid.
  • Regulations—In some states, prices are fully regulated by Public Service Commissions, while in others there is a combination of unregulated prices (for generators) and regulated prices (for transmission and distribution).

Electricity prices are usually highest in the summer

The cost of generating electricity actually changes minute-by-minute. However, most consumers pay rates based on the seasonal cost of electricity. Changes in prices generally reflect variations in electricity demand, availability of different generation sources, fuel costs, and power plant availability. Prices are usually highest in the summer when total demand is high, and when more expensive generation is added to meet the increased demand.

Learn more about the interconnection between electricity prices and demand in the July 12, 2012 Today in Energy article.

Electricity prices vary by type of customer

Prices are usually highest for residential and commercial consumers because it costs more to distribute electricity to them. Industrial consumers use more electricity and can receive it at higher voltages, so it is more efficient and less expensive to supply electricity to these customers. The price of power to industrial customers is generally closer to the wholesale price of electricity.

In 2013, the average retail price of electricity in the United States was 10.08 cents per kilowatt-hour (kWh).

Average prices by type of utility customer:

  • Residential: 12.1 cents per kWh
  • Commercial: 10.3 cents per kWh
  • Industrial: 6.8 cents per kWh
  • Transportation: 10.3 cents per kWh

Did you know?

The cost to generate electricity actually varies minute-by-minute.

During the course of a single day, the wholesale price of electricity on the electric power grid reflects the real-time demand for electricity. Demand is usually highest in the afternoon and early evening when usage is at a peak (so called on-peak hours), which means prices are higher at these times.

Most consumers pay rates based on the seasonal average price of electricity so they do not experience these price fluctuations.

Electricity prices vary by locality

Prices vary by locality because of the availability of power plants and fuels, local fuel costs, and pricing regulations. In 2013, annual average electricity prices ranged from approximately 33.3 cents per kWh in Hawaii to 7.1 cents per kWh in Washington. State Electricity Profiles include historical annual prices and other electricity statistics for each state.

The professional consultants at Onyx Power & Gas Consulting are always ahead of the current issues that may affect energy consumption and pricing. Now is the time to partner with an Onyx professional consultant to discuss energy management and secure energy prices based on today’s stable pricing.  Volatility in the energy markets makes it too precarious to take chances.  Partner with Onyx Power & Gas in Making Energy Make a Difference!


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