How Wholesale Electricity Prices Are Set
Electricity prices are influenced by many factors, including fixed delivery costs, infrastructure maintenance, and the cost of input materials. Private utility companies also need to create a financial return built into energy prices. No matter where your business operates, these myriad factors can impact energy expenses and your organization's profitability.
Setting Electricity Rates Based on Several Factors
For public and private utilities companies, electricity prices start with the costs of generating and distributing electricity within their service area. The most important variables in electricity costs are fuels, power plant expenses, transmission, regulations, and weather.
Fuel Costs and Electricity Prices
Fuel prices for coal, natural gas, and other materials have led to considerable price volatility. As the world shifts toward renewable, these prices will be easier to predict and model, helping utilities and business owners budget both energy supply and demand more effectively.
Power Plant Costs
Power generation has considerable capital expenses that must be financed. Coal, natural gas, and other plants also incur considerable maintenance, upgrades, and expanded operations expenses. The availability of replacement parts and skilled labor to implement these repairs is also a factor. Supply chain shortages in the energy industry dramatically impacted energy prices in 2023.
Transmission and Distribution Expenses
The aging electricity and distribution systems across the US require increasingly expensive repairs. Normal maintenance costs are exacerbated by extreme weather events. Those emergency repairs are even more costly; even well-insured utilities face increased premium expenses passed on to customers.
Weather Conditions
Extreme heat and cold lower transmission efficiency while increasing the energy demand. Summer heat waves and winter storms cause increased load on the grid, especially if local power generation is supported by hydroelectric facilities. Sustained drought events in several parts of the country have put additional strain on other regional energy generation facilities, especially natural gas.
Regulations
State and federal energy regulators have complete price control in some parts of the country, while several states have a mix of regulated and unregulated prices.
Electricity Generation is the Most Expensive Part of the Grid
61.6% of electricity costs are attributable to generation. Distribution accounts for 26.3%, while transmission is responsible for roughly 12.1% of the price of electricity. Renewable energy was responsible for over 25% of total supply in the second quarter of 2023, the first time green energy eclipsed that important milestone.
When Are Electricity Prices the Highest?
In most parts of the world, electricity prices are highest during the summer months. It's important to remember that electricity costs can change by the minute, which leads to a wide range of energy prices throughout a single day, not to mention weeks or months. Seasonal energy costs do tend to rise during summer for several reasons, including:
Net increase in energy demand
Power plant availability
Fuel source supply and reserves
Who Pays the Most for Electricity?
Residential households pay the highest electricity rates. In 2022, the residential electricity rate was 15.12 cents per kWh. Industrial rates were the lowest at 8.45 cents per kWh.
Residential: 15.12
Commercial 12.55
Transportation: 11.66
Industrial: 8.45
Electricity Prices by Location
There are substantial regional variations in energy prices. States that rely on imported fossil fuels for generation, like Hawaii (39.85 cents), pay nearly five times as much per kWh as states like Wyoming (8.24 cents), where fuels and renewables are abundant. Some states also subsidize energy costs or have few regulations, which keep prices lower for end-users.
Who Sets Electricity Prices in Michigan?
The Michigan Public Service Commission (MPSC) sets the rates charged to regulated utilities. Both electric and natural gas utility companies must obtain approval from the MPSC through a multi-step process. The rate case process includes:
A pre-filing announcement
An application to the commission
A pre-hearing period
Legal testimony and evidentiary hearing
A series of briefs
A proposal for decision (PFD)
A final order from the MPSC
If the request is not granted, utilities do have the option to appeal the decision. It’s a lengthy process that often takes a year or more from initial notice to a final decision. The Michigan system has undergone several adjustments in the past decade to improve outcomes on behalf of the consumer.
Own Your Energy Environment
Consumers exercise limited control over the cost of energy production, but they can control their consumption. We're working with local businesses to improve energy efficiency and reduce exposure to price volatility with bespoke solutions. From automated HVAC and lighting systems to sustainable development practices, count on Keen Technical Solutions to deliver the right solutions for your facilities. Let's get started; contact a Keen Technical Solutions consultant today.