The cost of generating electricity is the largest component of the price of electricity.
Did you know?
The cost to supply electricity actually varies minute-by-minute.
During the course of a single day, the wholesale price of electricity on the electric power grid reflects the real-time cost for 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), and costs to provide electricity are usually higher at these times.
Most consumers pay prices based on the seasonal average cost of providing electricity, so they do not experience these daily price fluctuations. Some utilities offer their customers time-of-day pricing to encourage conservation and to reduce peak demand for electricity.
Many factors influence electricity prices
Electricity prices generally reflect the costs to build, finance, maintain, and operate power plants and the electricity grid (the complex system of power transmission and distribution lines). Some for-profit utilities also include a return for owners and shareholders in their prices.
There are several key factors that influence the price of electricity:
- Fuels—Fuel costs can vary based on the per unit cost, such as dollars per ton for coal or thousand cubic feet for natural gas, and the relative cost, in dollars per million British thermal unit equivalent. Electricity generators with relatively high fuel costs tend to be used most during periods of high demand.
- Power plants—Each power plant has construction, maintenance, and operating costs.
- Transmission and distribution system—Maintaining and using the transmission system to deliver electricity contributes to the cost of electricity.
- Weather conditions—Rain and snow can provide water for low-cost hydropower generation. Extreme temperatures can increase the demand for electricity, especially for cooling. Severe weather can also damage power lines and add costs to maintain the electricity grid.
- Regulations—In some states, prices are fully regulated by Public Service Commissions, while in other states there is a combination of unregulated prices (for generators) and regulated prices (for transmission and distribution).
Electricity prices are usually highest in the summer
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 different generation sources, fuel costs, and power plant availability. Prices are usually highest in the summer when total demand is high and when more expensive generation is added to meet the increased demand.
Electricity prices vary by type of customer
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 it is more efficient and less expensive to supply electricity to these customers. The price of power to industrial customers is generally close to the wholesale price of electricity.
In 2014, the average retail price of electricity in the United States was 10.45 cents per kilowatt-hour (kWh).1 The average prices by major type of utility customers were:
- Residential: 12.50 cents per kWh
- Commercial: 10.75 cents per kWh
- Industrial: 7.01 cents per kWh
- Transportation: 10.27 cents per kWh
Electricity prices vary by locality
Prices vary by locality because of the availability of power plants and fuels, local fuel costs, and pricing regulations. In 2014, annual average electricity prices ranged from approximately 37.34 cents per kWh in Hawaii to 8.71 cents per kWh in Washington.
1 Calculated as U.S. total annual electric utility retail revenue divided by the total annual retail sales. The prices by sector are the revenues from each sector divided by sales to each sector.