This guide outlines the factors that can impact electricity prices, and can cause them to increase and decrease.
Summary – Factors That Impact Electricity Prices
- There are several factors that can impact electricity prices. Some factors can influence prices much more than others at any one time, and multiple factors can influence prices at once
- Supply and demand by producers (like utilities) and the market (electricity consumers) can play a large role, but the government and other bodies can too
- Apart from direct factors, there can also be external or bigger picture factors at play, that are more indirect, and impact on these other more direct factors e.g. a poor economy can influence investment in electricity, production, demand, and so on
- Price changes can be temporary (changing hourly or daily), or more permanent and longer term (lasting months and years)
- Final electricity rates, and rate structures, can differ between the individual cities, States and countries
- It’s worth noting the difference between electricity prices and energy prices, where electricity is the use of energy sources to produce electricity to be used by the consumer, whereas energy might include other energy forms like gas as a usable form of power/fuel
- We put together a guide that outlines examples of causes of increased, or high electricity prices in countries and States around the world. What this guide outlines is that causes can be country or State specific. Introduction of solar and wind can increase prices along with subsidies, taxes and schemes to support them, but government energy policy, investment in networks and electricity poles and wires, maxing out existing cheap energy sources, and a lack of supply from cheap or competitive along with increasing or peak demand, can all factor into higher electricity prices (along with other factors)
A good summary of electricity prices and how they are set and how they change might be:
- Electricity prices generally reflect the price to ‘build, finance, maintain, and operate power plants and the electricity grid’
– the EIA via wikipedia.org
From this description, we can see that electricity prices are far more comprehensive than just the primary energy source they come from. They involve whole electricity systems they have to work in a practical and feasible way, and can be impacted upon by factors external to the electricity system itself (as well as the factors within the electricity system).
Let’s take a look at the factors that can impact electricity prices in any one place (note – these are just some of the more prominent factors – they aren’t a comprehensive list):
Supply & Demand
This is more of a general factor than a specific factor. Supply and demand has a lot to do with the economic factors that impact electricity prices.
As two very basic examples:
- Surplus electricity fed into the electricity grid at any one time can lead to cheap or even negative electricity prices
- A lack of supply of power into the electricity grid can lead to more expensive electricity prices
Increased and decreased supply of electricity can be caused by a range of factors.
Cost Of Power Generation/Production
The cost to produce electricity is factored into the price of electricity that the user pays.
Different energy sources cost different amounts to deliver one unit (such as one KWh) of electricity.
Over the lifecycle of the energy source (construction, operation including fuel costs, maintenance etc.), this is called the levelized cost of electricity (LCOE).
Hydro, solar PV and onshore wind can have low LCOE’s in some countries because whilst in operation, costs are incredibly low – fuel is free. Compare this to some fossil fuel energy sources where fuel has to be paid for or there are higher operating costs.
Investment In Infrastructure & Networks
Building new transmission lines and poles, replacing old lines and poles, upgrading of power grids, electricity metering, and other infrastructure/network maintenance and development can be very expensive.
These investment costs for infrastructure and networks can be passed onto customers in their electricity bill.
The reliability and quality of an electricity system can impact prices:
- Larger currents require costlier infrastructure to minimize power loss, so consumers with low power factors get charged a higher electricity rate by their utility (wikipedia.org)
In this instance, we see that increases in electricity prices aren’t always bad as long as it can be proved that the reason for the price rise is an investment that leads to an increase in the quality or reliability of the electricity service.
Government Regulation, Subsidies Or Taxes
Intervention by government in the energy market, via regulations and standards (especially standards within energy portfolios), subsidies, taxes, or other measures, can all impact electricity prices for consumers.
They can also make production easier, harder, cheaper or more expensive for suppliers and new electricity retailers and competitors. They may also offer tariffs or pay outs to individual and residential energy producers that are feeding energy into the grid.
Green schemes for renewable energy targets, and renewable energy bonus schemes and feed in tariffs are two examples.
Multi Tiered Government Regulation
This happens in the US where the different levels of government have different levels of regulation over the energy market:
- In standard regulated monopoly markets like the U.S., there are multilevel governance structures to set electric rates. The rates are determined through a regulatory process that is overseen by a Public Service Commission. There are Public Service Commission compliance requirements to the state legislature. In addition, The Federal Energy Regulatory Commission (FERC) oversees the wholesale electricity market along with the interstate transmission of electricity. Public Service Commissions (PSC), which are also known as Public Utility Commissions (PUC), regulate the retail rates of utilities within each state. Different utility types are regulated differently in each state as well.
Some governments (like California for example) may have a renewable portfolio standard (that may or may not be legislated) that sets a minimum amount of each type of renewable energy that has to be used for electricity in an energy mix. These types of standards and regulations can impact the economic feasibility of an energy system as a whole, and also the profit, operating costs and overall economics of individual energy sources that have to ramp up and down, consider capacity of production, and other factors.
Local Weather Patterns
Doesn’t always impact prices directly, so local weather conditions can impact prices indirectly through supply and demand.
Three examples are:
- Hot weather usually means a demand for cooling, and cold weather usually means a demand for heating. Both these times can drive up demand for electricity, and with it, the prices
- Energy sources like solar and wind are subject to sun and wind conditions. When the sun is out and the wind is blowing, there is usually good supply and prices can be pushed down, and vice versa.
- Low rainfall can contribute to there not being enough water flow or water volume for hydro energy setups and dams on rivers
Profit Motive Of Utilities (& Retailers)
- Some utility companies are for-profit companies, and their prices will be influenced by their intrinsic need for financial return. These utility companies can exercise their political power within existing legal and regulatory regimes, to both guarantee that financial return, and, reduce competition from other sources, such as distributed generation [distributed generation includes sources such as rooftop solar and residential solar – essentially sources that aren’t commercial size or utility]
So, utilities may want a return on investment (over, say, a 20 or 30 year period). And, retailers (who buy wholesale electricity from suppliers and on-sell it to household consumers), may want to have a certain profit on their on-sold electricity (you’ve got to remember that retailers have costs such as admin, sales and call-centres, and so on to pay for and cover as well). Both of these factors can be built into an electricity bill.
Other Factors That Can Impact Electricity Prices
- Power Outages – interrupts electricity supply and can cause other interruptions to the grid that can drive up prices
- The Economy – recessions, downturns and times of economic uncertainty or poor economic conditions can lead to lack of investment, lowered supply, and increased prices. On the reverse, good economic conditions can lead to more competition and development in the energy sector that can lead to cheaper prices, or a better quality electricity service
- Being Energy Dependent/Being An Energy Importer – when States or countries are reliant on other States or countries for energy and electricity and not on their own supply, they can experience electricity price volatility in line with the State or country they are importing from
- Phase Balancing – where an electricity network has unbalanced loads, an electric company may charge by demand to balance them
- Island & Secluded Or Remote States – the Solomon islands for example is secluded (worldatlas.com). Alaska and Hawaii are remote. All three pay higher than average electricity prices.
The Cost To Generate Electricity vs The Cost To Supply It As A Service
The LCOE (Levelized Cost Of Electricity) of different energy sources in the US can be seen at:
Hydro, Wind, Solar PV and Combined Cycle Gas are some of the cheapest.
But, this is the cost over the lifetime of these energy sources to generate a unit of electricity.
Cost of an energy source is only one factor of electricity provision as a service.
In reality, electricity is a service where there are many moving parts and whole systems needed to deliver that service reliably to end users.
Energy sources like solar and wind are variable, and often require other more consistent energy sources to assist with meeting supply and demand at different times. They may even need energy storage in the form of batteries. As a service to provide electricity with variable energy sources in the mix in this instance, renewables can be more expensive or cause economic problems with other energy sources (when they have to turn on and shut off, ramp up and ramp down, and can’t run to capacity to provide return on investment or cover operating costs)
Fossil fuels on the other hand because they aren’t variable, can function on their own and might be cheaper as a service (even if they cost most in terms of LCOE).
Different short term and long term priorities must be balanced, as well as economic, social, environmental, and other priorities.
Some Other Notes On Electricity Prices
- Residential, commercial and industrial customers may pay different electricity tariffs/prices (there are different reasons for this such as the economics of stepping down voltages, political lobbying, and efficiency of the services to each type of customer – just to name a few)
- Wholesale and retail electricity prices differ – wholesale is usually cheaper as different retailers purchase wholesale electricity and add various charges to it before delivering it to homes
- Due to the complications of electricity generation, the cost to supply electricity varies minute by minute (wikipedia.org)
- In a standard regulated monopoly like the US, there are different variables, but also multilevel governance structures to determine rates
- Electricity can’t be stored as easily as gas – so, it generally needs to be used at the same time as it is produced, unless it’s stored in a battery
- Read more about rate structures in the US at https://en.wikipedia.org/wiki/Electricity_pricing
- The price of energy depends on a range of different supply and demand conditions, including the geopolitical situation, network costs, environmental protection costs, severe weather conditions, and levels of excise and taxation.