Although we pay our energy bills every month, we are hardly ever aware of what actually determines the price of our power. In the United States, most people know prices are different in each region but what are the other factors that determine our rates?
Article at a glance
- More suppliers lower prices, but high demand during peak hours or winter raises costs.
- High generation and delivery expenses, plus pipeline investments, increase consumer prices.
- Extreme temperatures in summer and winter cause spikes in electricity prices due to increased demand.
- Cities with higher industrial activity experience fluctuating power rates as demand surges.
Electricity prices are dynamic so they can change every hour, depending on the demand and other factors. Here is a list of five factors that can impact the price you pay for power.
1. Power-generating capacity and availability
This comes down to supply and demand. In regions where there are more than two energy companies, prices tend to be lower than usual because the supply is higher. This is especially true when the demand is high especially in the winter or during peak hours.
2. How energy companies deliver power
Energy companies generate and deliver energy to use as soon as possible. This on-demand process is very expensive. Additionally, gas pipeline capacity is another factor that plays an important role in energy distribution. In the last decade, many coal firms have been shut down, and natural gas has come to fill the vacuum left by coal. This has prompted many companies to invest a lot of money to construct a more efficient and resistant pipeline infrastructure to provide a better service. These costs all add up and guess who those costs are passed on to? You guessed it, you, the consumer.
Additional Read: Understanding The Basics Of Electricity Generation & How To Purchase It For Your Business
3. Weather patterns
In some regions, the weather is a key determinant when it comes to energy prices. In the summer and winter, prices tend to spike because of the high demand. According to some studies, when the weather is extreme, prices can spike up to 20 times the average rate.
4. Drivers of electric demand
According to research published by the European Commission, electricity prices can vary thanks to the existence of two additional subfactors.
Income drivers: Demographics, gross domestic product and the way the population grows economically all have factors on pricing. Simply put, in areas where wealthier people live, power rates are usually higher (yet this doesn’t happen in all cases.) This phenomenon is more common in capitalist nations where power is not subsidized.
Price divers: How energy is generated also help determine the price. For example, producing wind energy can sometimes be more expensive up front than generating electric energy through traditional methods. This is because wind power companies work with specialized equipment and usually have to pay specialists to operate the already expensive machinery which has a high upfront cost. Also, the workforce is pricier when you have to pay people in an upcoming coming industry.
On the other hand, in many other countries (especially in Europe and some places in Asia like Japan), solar energy is viewed as an alternative to reduce costs. Although the future is near, this is not an immediate solution for all the countries of the world. because many countries just don’t have the same capacity or regulation to operate alternative energy sources.
5. Industrialization
Even though this point has been previously touched on, it is important to add that power rates vary depending on the type of city you are in. When a city is industrialized, the energy demand can skyrocket. As the demand is going up, prices can vary wildly.
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Navigate Power is a leading electricity and natural gas consulting firm, headquartered in Chicago, IL. Ranked no. 550 on the 2017 and no. 856 on the 2018 Inc. 5000 list as one of the fastest growing companies in the nation, Navigate Power continues to expand into new markets nationwide and currently manages over 30,000 commercial energy accounts and over one billion dollars in energy budgets.
