Electricity pricing


Electricity pricing can vary widely by country or by locality within a country. Electricity prices are dependent on many factors, such as the price of power generation, government subsidies or taxes, local weather patterns, transmission and distribution infrastructure, and multi-tiered industry regulation. The pricing or tariffs can also differ depending on the customer-base, typically by residential, commercial, and industrial connections.
According to the U.S. Energy Information Administration, "Electricity prices generally reflect the cost to build, finance, maintain, and operate power plants and the electricity grid." Where pricing forecasting is the method by which a generator, a utility company, or a large industrial consumer can predict the wholesale prices of electricity with reasonable accuracy. Due to the complications of electricity generation, the cost to supply electricity varies minute by minute.
Some utility companies are for-profit entities and their prices include a financial return for owners and investors. These utility companies can exercise their political power within existing legal and regulatory regimes to guarantee a financial return and reduce competition from other sources like a distributed generation.

Rate structure

In standard regulated monopoly markets like the United States, there are multilevel governance structures that set electricity rates. The rates are determined through a regulatory process that is overseen by a Public Service Commission. In addition, the Federal Energy Regulatory Commission oversees the wholesale electricity market along with the interstate transmission of electricity. Public Service Commissions, which are also known as Public Utility Commissions, regulate utility rates within each state.
The inclusion of renewable energy distributed generation and advanced metering infrastructure in the modern electricity grid has introduced many alternative rate structures. There are several methods that modern utilities structure residential rates:
The simple rate charges a specific dollar per kilowatt consumed. The tiered rate is one of the more common residential rate programs. The tiered rate charges a higher rate as customer usage increases. TOU and demand rates are structured to help maintain and control a utility's peak demand. The concept at its core is to discourage customers from contributing to peak-load times by charging them more money to use power at that time. Historically, rates have been minimal at night because the peak is during the day when all sectors are using electricity. Increased demand requires additional energy generation, which is traditionally provided by less efficient "peaker" plants that cost more to generate electricity than "baseload" plants. However, as greater penetration from renewable energy sources, like solar, are on a grid the lower cost, electricity is shifted to midday when solar generates the most energy.
A feed-in tariff is an energy-supply policy that supports the development of renewable power generation. FITs give financial benefits to renewable power producers. In the United States, FIT policies guarantee that eligible renewable generators will have their electricity purchased by their utility. The FIT contract contains a guaranteed period of time that payments in dollars per kilowatt hour will be made for the full output of the system.
Net metering is another billing mechanism that supports the development of renewable power generation, specifically, solar power. The mechanism credits solar energy system owners for the electricity their system adds to the grid. Residential customers with rooftop photovoltaic systems will typically generate more electricity than their home consumes during daylight hours, so net metering is particularly advantageous. During this time where generation is greater than consumption, the home's electricity meter will run backward to provide a credit on the homeowner's electricity bill. The value of solar electricity is less than the retail rate, so net metering customers are actually subsidized by all other customers of the electric utility.

Price comparison by power source

The cost of electricity also differs by the power source. The net present value of the unit-cost of electricity over the lifetime of a generating asset is known as the levelized cost of electricity. LCOE is the best value to compare different methods of generation on a consistent basis.
In the United States the EIA estimated LCOE for different sources in their Annual Energy Outlook 2019 to be:
Generation SourceTotal LCOE Including Tax Credit
Hydro39.1
Solar PV45.7
Wind 49.8
Gas Combined Cycle46.3–67.5
Nuclear77.5
Biomass92.2
Coal98.6–104.3

The generating source mix of a particular utility will thus have a substantial effect on their electricity pricing. Electric utilities that have a high percentage of hydroelectricity will tend to have lower prices, while those with a large amount of older coal-fired power plants will have higher electricity prices. Recently the LCOE of solar photovoltaic technology has dropped substantially. In the United States, 70% of current coal-fired power plants run at a higher cost than new renewable energy technologies and by 2030 all of them will be uneconomic. In the rest of the world 42% of coal-fired power plants were operating at a loss in 2019.

Price comparison across countries

The table below shows a simple comparison of electricity tariffs in industrialized countries and territories around the world, expressed in US dollars. The comparison does not take into account factors including fluctuating international exchange rates, a country's purchasing power, government taxes and subsidies on electricity or retail discounts that are often available in deregulated electricity markets.
For example, in 2012, Hawaii residents had the highest average residential electricity rate in the United States, while Louisiana residents had the lowest average residential electricity costs. Even in the contiguous United States, the gap is significant with New York residents having the highest average residential electricity rates in the lower 48 U.S. states.

Global comparison

Denotes countries with government subsidized electricity tariffs.
Mexico subsidizes electricity according to consumption limits. More than 500 kWh consumed bimonthly receive no subsidies. Only 1% of Mexico's population pays this tariff.
Hawaii.
Prices don't include VAT
San Diego, California high-tier
The U.S. Energy Information Administration also publishes an incomplete list of international energy prices, while the International Energy Agency provides a thorough, quarterly review.

Eurostat

The following table shows electricity prices both for household and non-household consumers within the European Union and Iceland, Liechtenstein, Norway, Albania, Republic of Macedonia, Montenegro, Serbia, Turkey, Bosnia, Herzegovina, Kosovo, Moldova, and Ukraine.
CountryHouseholdsNon-household
0.086–
0.1980.100
0.1860.107
0.2880.109
0.0980.074
0.1240.092
0.1830.139
0.1490.071
0.3010.098
0.1320.085
0.1600.068
0.0810.056
0.1760.092
0.3050.151
0.1620.119
0.1130.078
0.152-
0.2360.124
0.2080.145
0.0650.080
0.1580.116
0.1110.083
0.1620.078
0.1360.138
0.1010.085
0.1000.077
0.1560.076
0.1610.070
0.1450.086
0.2230.115
0.1290.079
0.0700.075
0.1440.111
0.1610.078
0.2180.103
0.1990.065
0.0960.060
0.038-
0.1860.125


CountryHouseholdsNon-household
0.1970.100
0.2860.108
0.0980.074
0.1310.098
0.1790.136
0.1530.073
0.3070.100
0.1380.089
0.1630.069
0.1790.094
0.3070.153
0.1560.117
0.1130.078
0.2500.132
0.2150.150
0.1580.116
0.1100.082
0.1680.083
0.1360.138
0.1760.086
0.1450.086
0.2280.117
0.1410.086
0.1480.114
0.1620.079
0.2230.106
0.2130.069
0.1900.127

Electricity price forecasting

Electricity price forecasting is the process of using mathematical models to predict what electricity prices will be in the future.

Forecasting methodology

The simplest model for day ahead forecasting is to ask each generation source to bid on blocks of generation and choose the cheapest bids. If not enough bids are submitted, the price is increased. If too many bids are submitted the price can reach zero or become negative. The offer price includes the generation cost as well as the transmission cost, along with any profit. Power can be sold or purchased from adjoining power pools.
The concept of independent system operators fosters competition for generation among wholesale market participants by unbundling the operation of transmission and generation. ISOs use bid-based markets to determine economic dispatch.
Wind and solar power are non-dispatchable. Such power is normally sold before any other bids, at a predetermined rate for each supplier. Any excess is sold to another grid operator, or stored, using pumped-storage hydroelectricity, or in the worst case, curtailed. Curtailment could potentially significantly impact solar power's economic and environmental benefits at greater PV penetration levels. Allocation is done by bidding.
The effect of the recent introduction of smart grids and integrating distributed renewable generation has been increased uncertainty of future supply, demand and prices. This uncertainty has driven much research into the topic of forecasting.

Driving factors

Electricity cannot be stored as easily as gas, it is produced at the exact moment of demand. All of the factors of supply and demand will, therefore, have an immediate impact on the price of electricity on the spot market. In addition to production costs, electricity prices are set by supply and demand. However, some fundamental drivers are the most likely to be considered.
Short-term prices are impacted the most by the weather. Demand due to heating in the winter and cooling in the summer are the main drivers for seasonal price spikes. Additional natural-gas fired capacity is driving down the price of electricity and increasing demand.
A country's natural resource endowment, as well as its regulations in place greatly influence tariffs from the supply side. The supply side of the electricity supply is most influenced by fuel prices, and CO2 allowance prices. The EU carbon prices have doubled since 2017, making it a significant driving factor of price.

Weather

Studies show that demand for electricity is driven largely by temperature. Heating demand in the winter and cooling demand in the summer are what primarily drive the seasonal peaks in most regions. Heating degree days and cooling degree days help measure energy consumption by referencing the outdoor temperature above and below 65 degrees Fahrenheit, a commonly accepted baseline.
In terms of renewable sources like solar and wind, weather impacts supply. California's duck curve shows the difference between electricity demand and the amount of solar energy available throughout the day. On a sunny day, solar power floods the electricity generation market and then drops during the evening, when electricity demand peaks.

Hydropower availability

, streamflows, seasonality, salmon, etc. all affect the amount of water that can flow through a dam at any given time. Forecasting these variables predicts the available potential energy for a dam for a given period. Some regions such as Pakistan, Egypt, China and the Pacific Northwest get significant generation from hydroelectric dams. In 2015, SAIDI and SAIFI more than doubled from the previous year in Zambia due to low water reserves in their hydroelectric dams caused by insufficient rainfall.

Power plant and transmission outages

Whether planned or unplanned, outages affect the total amount of power that is available to the grid. Outages undermine electricity supply, which in turn affects the price.

Economic health

During times of economic hardship, many factories cut back production due to a reduction of consumer demand and therefore reduce production-related electrical demand.
Global markets
The UK has been a net importer of energy for over a decade, and as their generation capacity and reserves decrease the level of importing is reaching an all-time high. Their fuel price's dependence on international markets has a huge effect on the cost of electricity, especially if the exchange rate falls. Being energy dependent makes their electricity prices vulnerable to world events, as well.
Government regulation
Governments may choose to make electricity tariffs affordable for their population through subsidies to producers and consumers. Most countries characterized as having low energy access have electric power utilities that do not recover any of their capital and operating costs, due to high subsidy levels.
In the United States, federal interventions and subsidies for energy can be classified as tax expenditure, direct expenditures, research and development, and DOE loan guarantees. Most federal subsidies in 2016 were to support developing renewable energy supplies, and energy efficiency measures.

Power quality

Excessive Total Harmonic Distortions and low power factor are costly at every level of the electricity market. The impact of THD is difficult to estimate, but it can potentially cause heat, vibrations, malfunctioning and even meltdowns. The power factor is the ratio of real to apparent power in a power system. Drawing more current results in a lower power factor. Larger currents require costlier infrastructure to minimize power loss, so consumers with low power factors get charged a higher electricity rate by their utility. Power quality is typically monitored at the transmission level. A spectrum of compensation devices mitigate bad outcomes, but improvements can be achieved only with real-time correction devices. Most modern devices reduce problems, while maintaining return on investment and significant reduction of ground currents. Power quality problems can cause erroneous responses from many kinds of analog and digital equipment.

Phase balancing

The most common distribution network and generation is done with 3 phase structures, with special attention paid to the phase balancing and resulting reduction of ground current. It is true for industrial or commercial networks where most power is used in 3 phase machines, but light commercial and residential users do not have real-time phase balancing capabilities. Often this issue leads to unexpected equipment behavior or malfunctions and in extreme cases fires. For example, sensitive professional analog or digital recording equipment must be connected to well-balanced and grounded power networks. To determine and mitigate the cost of the unbalanced electricity network, electric companies charge by demand or as a separate category for heavy unbalanced loads. A few simple techniques are available for balancing that require fast computing and real-time modeling.