We all use electricity every day, and we pay an energy bill every month. But who is it that decides how much you pay for that electricity?
The answer to that question isn’t straightforward because it turns out there are a number of entities that influence electricity prices. By the time you’re given a retail electric rate, the electricity you purchased has already been bought a few times, and that impacts the price you pay at home.
Let’s take a look at how electricity pricing is determined, starting with factors that can influence prices before electricity is generated.
Regulations Related to Energy Costs (State Government)
There’s one entity that plays a major role in the price of electricity long before it’s generated and delivered. The state government has a hand in electricity pricing no matter whether you’re in a deregulated or regulated energy market.
Each state has a public utilities commission (PUC) or department that’s in charge of overseeing the consumer energy market. One of their top priorities is keeping retail energy prices (what you pay) in check. Typically, PUCs will put a cap on transmission fees that utilities charge for delivering electricity. This helps to keep energy costs in check for consumers.
However, regulations vary by state. Some states have full regulation over wholesale and retail electricity prices. Other states don’t regulate generator fees or utilities at all.
The Cost of Energy Sources Used to Create Electricity (Fuel Providers)
Where your electricity comes from has a huge influence on the price. Electricity can be a natural phenomenon in the form of lightning, but it’s largely manmade. We’ve figured out how to generate electricity using a variety of fuel sources, and that’s where the costs begin. In order to create electricity one of the following is needed:
- Natural Gas
- Renewable Resources (hydropower, solar, wind, biomass, etc.)
- Petroleum
- Coal
- Nuclear Power
So, fuel providers are the first to influence the actual price of electricity based on the rate that they charge electricity generators for their fuel. The fuel providers are setting their prices based on the cost of extraction as well as the current supply and demand for their fuel, which can be a global measure these days. Supply and demand is also heavily dependent on the weather.
The Cost of Generating Electricity – (Power Plants/Generators)
Fuels can’t produce energy on their own. They must go through a process to be converted to energy, and that requires expensive infrastructure. Power plants must be constructed, operated and maintained in order to generate electricity.
The cost of doing that is factored in with the price of the fuel source to determine the rate the electricity generator charges local utilities and retail energy providers. This is what’s known as the wholesale price of electricity.
The Cost of Getting Electricity to a Home or Business (Retail Energy Providers and Utilities)
Once the fuels are sourced and the electricity is generated there’s still more to do, which means there are more costs involved that increase the price of electricity. There are one or two primary players involved at this point: utilities and retail energy providers (REPs).
Regulated Energy Markets
In a regulated energy market there are no retail energy providers. Consumers have to simply go with the energy plans offered by the local utility that’s based on the rates they negotiate with electricity generation companies. That means the electricity prices that all consumers in the area pay is largely dependent on what the utility pays.
You’ll see another fee on your electric bill from the utility company. The utility company will charge a delivery fee or transmission fee. This is an additional fee that all consumers pay to cover the cost of maintaining power lines and distribution systems for delivering electricity.
Deregulated Energy Markets
In a deregulated energy market there are retail energy providers that work with consumers to establish electric service instead of the local utility. Each provider negotiates with electricity generators to get the best rate possible. The rates they pay are the basis for the rates they offer on consumer electricity plans. This model helps to increase competition and encourages REPs to secure the lowest rate possible.
Consumers in deregulated markets will also have to pay the utility delivery or transmission fee. That’s a set price that should be the same every bill no matter what electricity plan you choose.
Energy Plan Comparison Shopping (Consumers)
In a regulated market, consumers aren’t going to have much of an influence over electricity rates. They have to simply accept what the utility has to offer, but that isn’t the case in a deregulated market.
In deregulated markets, consumers are going to have an impact on the electricity price they pay because they have the ability to comparison shop. They have the power to pass up REPs that are charging high rates and look around for the best price per kWh. Ultimately, consumers in deregulated markets help determine retail energy prices based on what they are willing to pay. The more consumers comparison shop the lower rates will be because the REPs have to compete to attract customers.
As you can see, electricity prices are a moving target because there are so many variables and people involved. What one entity pays up the line will have an impact on the prices others pay further along in the distribution process.
It’s time to play a role in the electricity prices you pay in New Hampshire, Massachusetts and Maine! Provider Power energy plans offer a fixed rate so you know what you’re paying every month. Use your zip code to start comparing energy plans!
