What Factors Influence Electricity Prices?

What Factors Influence Electricity Prices?

by

SelJones

The Cost of Generation:

Electricity is generated in power plants that are fuelled in a variety of different ways. Although there are concerns around consumption of non-renewable fuel sources, many power generation companies continue to rely heavily on fossil fuels, such as coal and gas. Fossil fuels account for around a third of the electricity generated in the United States. Nuclear power plants provide around 20% of the electricity used in American homes, with the remaining 13% generated through renewable sources of energy, such as biomass, wind, water, and solar power. Although the percentage of electricity from renewable sources may seem relatively small, the United States is the second largest generator of electricity from renewable sources. Only China generates more energy from renewable sources.

Companies that generate electricity can sell it to utility distributors on a wholesale basis or direct to retail customers themselves. Many of the smaller utility companies are only responsible for distribution. These companies purchase electricity in bulk from wholesale providers and then arrange for it to be distributed to individual homes.

The breakdown of the cost of each unit of electricity will vary between providers. However, at least half of the retail cost of each unit of electricity reflects the price that the supplier has had to pay to generate the electricity or purchase it from the wholesaler.

Wholesale Prices:

The wholesale price of electricity is not static. It varies depending on the conditions in the market. Electricity cannot be stored. This means that the supply and demand must be kept in balance. If demand for electricity outstrips supply then prices will rise. Demand for electricity can be affected by the seasons because electricity is used to heat our homes in winter and cool them down in summer. Although unexpected spikes in demand can push up the cost of wholesale electricity in the short term, most utility companies buy electricity through long-term contracts, in which they try to anticipate the level of demand. This allows them to push for the most competitive price and level out the fluctuations in price that may otherwise be experienced by consumers.

Buying electricity in advance presents challenges because it can be difficult to accurately anticipate the level of demand. If a utility company expects a severe winter, it may commit to buy additional electricity because it anticipates that its customers will use more electricity to heat their homes. If the winter is milder than expected, the usage may be lower than anticipated. In such circumstances, the distributor will place the excess units of electricity on the market. This can lower wholesale prices in the short-term if supply suddenly exceeds demand.

Infrastructure:

Around a third of the cost paid for each unit of electricity is attributable to the infrastructure required to transport it from the point of generation to the point of use. Electricity is transported from large power stations along a network of high-voltage cables to local substations. From the substations, it is then transported along lower-voltage lines to individual homes. This network of cables and substations is known as the grid.

The cost of managing, maintaining, and extending the grid is passed on to electricity consumers through their utility bills.

The cost of electricity for domestic use tends to be higher than the price charged to companies that require electricity for industrial purposes. This price differential reflects the higher cost of supplying smaller amounts of electricity to a large number of individual homes compared to supplying one large industrial user.

Stockholders:

Although some electricity companies are municipal companies that operate on a not-for-profit basis, most private utility companies have stockholders. Stockholders expect to see a return on their investment and so the utility companies need to set their electricity prices at a level that enables them to meet all of their running costs and generate a healthy profit.

Location:

The cost of electricity will vary depending on the location. There can be significant differences in utility prices between states, depending on the type of electricity generation available within the state, the level of demand, and the proximity of the power generation facility. According to the U.S. Energy Information Administration, the average retail price for electricity in North Dakota in February 2013 was 8.25 cents per kilowatt hour. For the same month, the comparable cost of electricity in New York was 18.89 cents and in Hawaii was 36.58 cents.

Usage in the Home:

The only way in which individual retail customers can exert influence over the unit cost of the electricity that they use is by shopping around for the most competitive supplier. However, individual home owners can lower their monthly or quarterly electricity bills by using electricity more efficiently.

There are obvious savings to be made simply by ensuring that lights and electrical appliances are switched off when not in use. Think twice about leaving equipment in standby, as it may still draw in power. By switching electrical items off at the socket users can avoid unnecessary residual electricity usage. Power strips are now available that will automatically cut the power to ancillary devices, such as DVD players or printers, when the television or computer is shut down.

In homes that are heated using electricity, turning the thermostat down by one or two degrees will not make a noticeable difference to the room temperature but could reduce electricity costs over the course of a year. In the same way, air-conditioned homes could remain at a comfortable temperature but cost less to cool if the thermostat was turned up by one or two degrees. Heating or air-conditioning that works on a timer should be set to come on and go off at appropriate times to avoid heating or cooling an empty house.

Sam Jones

has saved money on his energy bills by getting a

dual fuel

tariff and reading the uSwitch winter fuel allowance advice pages.

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What Factors Influence Electricity Prices?