Explaining Electricity

Do you know just how many variables play into your statement at the end of each month? Electricity prices generally reflect the cost to build, finance, maintain, and operate power plants and the electricity grid (the complex system of power transmission and distribution lines).

Several key factors influence the price of electricity:

Fuels: Fuel prices, especially for natural gas and petroleum fuels, may increase during periods of high electricity demand and when there are fuel supply constraints or disruptions because of extreme weather events and accidental damage to transportation and delivery infrastructure. Higher fuel prices, in turn, may result in higher costs to generate electricity. Generating electricity is the largest component of electricity's cost.

Power plant costs: Each power plant has financing, construction, maintenance, and operating costs. Transmission and distribution system: The electricity transmission and distribution systems that connect power plants with consumers have construction, operation, and maintenance costs, which include repairing damage to the systems from accidents or extreme weather events and improving cybersecurity.

Weather conditions: Extreme temperatures can increase demand for heating and cooling, and the resulting increases in electricity demand can push up fuel and electricity prices. 

Regulations: In some states, public service/utility commissions fully regulate prices, while other states have a combination of unregulated prices (for generators) and regulated prices (for transmission and distribution).

Time: The cost to supply electricity varies minute by minute. The wholesale price of electricity on the electric power grid reflects the real-time cost of supplying electricity. Demand for electricity contributes to the cost of supplying electricity. Electricity demand is usually highest in the afternoon and early evening (peak hours), so costs to provide electricity are usually higher at these times.

Retail pricing: Retail electricity prices are usually highest for residential and commercial consumers because it costs more to distribute. Industrial consumers use more electricity and can receive it at higher voltages, so supplying electricity to these customers is more efficient and less expensive. The retail price of electricity to industrial customers is generally close to the wholesale price of electricity.

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