Anyone who’s compared their energy bills knows that electricity prices can fluctuate from month to month. But why is that? And what determines electricity prices in the first place?
The cost of energy fluctuates so much that prices actually update by the minute, and you can find significant differences across locations. For instance, state electricity profiles from 2019 show Louisiana had the lowest average retail price of 7.71 cents per kilowatt-hour (kWh), while Hawaii residents saw the highest costs at 29.18 cents per kWh. Location is just one of the many factors affecting electricity prices, so let’s take a look at some of the others.
Factors Impacting the Cost of Energy
The U.S. Energy Information Administration found that in 2019, 58% of electricity costs went to generation, while 13% and 29% went to transmission and distribution, respectively. A significant chunk of the cost covers aspects other than producing the energy, and within each of these categories is even more variation.
Some of the factors impacting electricity prices include:
- The type of fuel. As the types of power generation grow and evolve, costs do too. Whether it comes from renewable sources, nuclear power plants, coal or another source, the type of fuel used will affect the price you pay for energy.
- Season. Summer is notorious for driving up prices as people crank on the air conditioning and demand goes up.
- Weather. Sometimes, inclement weather can actually help production. Wind power turbines and rain can help create hydropower, increasing supplies and reducing costs. Yet extremely bad weather can increase demand instead.
- Overhead. As with most transactions, in addition to the product, you also pay a little to keep the business moving and support overhead costs. Operating power plants and building and maintaining transmission and distribution systems can add to the price of electricity.
- Type of consumer. Industrial customers typically pay a little less. By using more and simplifying energy delivery, they often get lower prices, like buying in bulk.
- Regulations. State regulations can vary and greatly affect the final price you pay for electricity.
- Market status. If you’re in an area with a competitive market, you may see lots of variation due to different offerings and approaches to business. Financial speculation can also impact the state of the market and affect pricing.
- Supply and demand. As with most industries, the state of production and the demand of clients dictates how much the energy is actually worth.
- Location. Location tends to be a culmination of many other electricity price factors. Depending on the location of a residence or business, regulations, climate, power plant availability and market status can all vary widely.
Manage Energy Rates With RateAcuity
With so many different factors that go into the equation, it’s important to stay on top of energy rates. Knowing what affects electricity prices and how those changes will impact clients can make a big difference in predicting rates and making energy-related business decisions.
RateAcuity can increase visibility through a comprehensive electricity rate database with historical and up-to-date information. It’s available as either a web portal or an application programming interface (API) that integrates into your application. When it’s time to create energy forecasts and analyze electricity information, RateAcuity offers speed, ease of use and highly accurate data.