The cost of generating electricity is the largest component of electricity prices, but there are many others factors.
Before you flip the switch, a lot has to happen. Electricity prices reflect the cost to build, finance, maintain, and operate power plants and the electricity grid (the complex system of power transmission and distribution lines). There are many other factors also.
- Cost of Fuels: Fuel costs can vary, especially during periods of high demand. High electricity demand can increase demand for fuel, such as natural gas, which can result in higher prices for the fuel and, in turn, higher costs to generate electricity.
- Power Plants: Each power plant has construction, maintenance, and operating costs.
- Transmission and Distribution System: The electricity transmission and distribution systems that deliver electricity have maintenance costs, which include repairing damage to the systems from accidents or extreme weather conditions.
- Weather Conditions: Rain and snow provide water for low-cost hydropower generation. Wind can provide low-cost electricity generation from wind turbines when wind speeds are favorable. However, extreme temperatures can increase the demand for electricity, especially for cooling, and demand can drive prices up.
- 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).
- Seasons: The cost to supply electricity actually changes minute by minute. However, most consumers pay rates based on the seasonal cost of electricity. Changes in prices generally reflect variations in electricity demand, availability of generation sources, fuel costs, and power plant availability. Prices are usually highest in the summer when total demand is high because more expensive generation sources are added to meet the increased demand.
- Location: Prices vary by locality because of the availability of power plants and fuels, local fuel costs, and pricing regulations
- Type of Consumer: Electricity prices are usually highest for residential and commercial consumers because it costs more to distribute electricity to them. 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 price of electricity to industrial customers is generally close to the wholesale price of electricity.