Everything About Electricity Rates
Consumer electricity rates follow wholesale market costs, which are based on a supply and demand pricing. In October 2018, the annual average residential electricity price in the U.S. was 12.87 cents per kilowatt-hour, while electricity rates across the nation ranged from 9.11 cents per kilowatt-hour in Louisiana to 32.46 cents per kilowatt-hour in Hawaii, according to the Energy Information Agency. A typical U.S. household used about 1,069 kWh a month of electricity. Rate structures are often complex, and it may not be easy to fully understand how electricity rates are determined.
As the actual cost to supply electricity to the customer changes by the minute, most residential users pay rates based on the seasonal average cost. This eliminates monthly or even daily price fluctuations and makes billing easier for both, the consumer and the utility company or retail electricity provider.
Electricity Rate Components
Typically, residential customers are billed for the actual consumption in kilowatt-hours, sometimes for the maximum power used in kilowatts. They pay a share for the transmission and distribution infrastructure to get their power delivered.
Energy generation makes up the largest portion of the electricity price (59%), followed by distribution costs (28%). The rest is transmission costs (13%). Electricity generation cost varies with the type of fuel and the corresponding power plants. While fuel cost is mainly driven by supply and demand, power plants have maintenance, operating and repair costs on top of the construction cost.
A smaller component that often varies between states, regions and utility companies are taxes, service fees and fuel cost adjustments.
Electricity market prices change constantly based on the cost to supply electricity to the individual groups of customers. For residential customers, the cost per kilowatt-hour is typically fixed over the length of their contracts.
With fluctuations in electricity demand, market prices follow certain demand patterns throughout the day, week and year. Peak hours on a weekday are usually in the afternoon and early evening. Demand is typically lower on weekends and holidays and higher in the summer.
Besides variations in demand, the cost for infrastructure and the type of available fuels plays an important part, especially in geographically isolated regions. The highest rates in the nation are in Hawaii and Alaska.
The United States has over 3,300 utility companies in regulated and deregulated markets. They offer fixed rates where the price per kilowatt-hour remains the same. However, many also offer different rate structures and pricing options such as tiered rates, time of use rates and sometimes also demand rates.
Tiered or step rates are a common residential rate type where customers pay a higher price per kilowatt-hour for the first 500 or 600 kilowatt-hours used in a month. Once the threshold is reached, the price per kilowatt-hour goes down. It incentivizes the customer to use (and pay for) more electricity.
Some utilities offer their residential customers time-of-use pricing to reduce peak demand by giving incentives to use less electricity when demand is high. With this rate structure, the price per kilowatt-hour varies based on the time of the day and often between weekdays and weekends.
Demand rates are based on the peak demand, the highest amount of power used in a billing period. These rates are typically for customers that require high amounts of power for short intervals like industrial customers. Demand rates are incentives to change the customer’s power usage behavior. Electricity generation is cheaper when demand is spread out evenly, avoiding high peaks or generation spikes. That means utilities are incentivizing consumers to spread out demand whenever possible.
Electricity rates vary significantly based on the type of customer. At an average rate of 12.87 cents per kilowatt-hour (October 2018), residential customers often pay twice as much per kilowatt-hour as the big industrial users at a an average kilowatt-hour rate of 6.91 cents. The average commercial customer paid 10.74 cents per kilowatt-hour.
The lower prices are due to the higher consumption, the higher voltage of the delivered electricity and better price negotiation possibilities for large electricity consumers. Large commercial and industrial customers also pay peak demand charges, which in some case can make up a big portion of the bill.
Residential electric bills are usually made up of three components: a basic customer service charge, the market rate energy charges and a delivery service charge for every kilowatt-hour delivered.
Baltimore Gas & Electric Company (BGE) for example charges their residential customers a service charge of $7.20 a month, the actual energy charge of $0.07814 kWh and a delivery charge of $0.03147/kWh. In their Standard Offer Service (SOS), the current market-priced service rate is split up into a generation rate (currently 6.714 cents per kilowatt-hour) and a transmission rate (currently 1.1 cents per kilowatt-hour) that together add up to the total SOS rate.
The generation rate again is comprised of three components: the actual energy rate of 6.490 cents per kilowatt-hour, an admin charge of 0.211 cents per kilowatt-hour and taxes $0.00013/kWh. Check out our article to learn how to read your energy bill!
Electricity Bills Fluctuate
Electricity prices are driven by a multitude of different factors. Some are predictable but others are not. There is a general trend for electricity rates to rise due to the market penetration of renewable energy sources, the increasing capacity and integration of energy storage and the aging power infrastructure in the U.S.
Weather and environmental conditions have a significant influence on electricity prices. Weather is often unpredictable while it directly affects consumption. Hot summers for example increase demand while at the same time electricity generation may be down due to low water levels in rivers and reservoirs. Low water levels directly limit the output of hydroelectric plants and also the cooling water supply of fossil fuel or nuclear powered plants, which reduces their electricity output. Electricity rates usually follow two billing seasons for summer (4 billing cycles from June through September) and non-Summer (8 billing cycles from October through May).
A more predictable factor are government regulations, especially in regulated markets. Regulatory agencies or the Federal government can introduce changes, which result in changes in electricity rates. Regulations can also affect source fuel markets, which then impacts electricity prices.
Predictable but sometimes also unexpected, power outages affect electricity market prices as power plants are scheduled to shut down periodically for maintenance and repairs or due to inclement weather situations. Scheduled outages and unexpected closures both can impact wholesale prices.
Markets also react to geopolitical events or in anticipation of extreme weather events such as hurricanes or floods and to the damages they can cause to the energy infrastructure. Our energy guide will go into more detail about electricity rates.