Electricity prices generally reflect the costs of electric service – what it costs to build, finance, maintain, manage and operate power generation plants.
Utilities incur costs in order to operate and administer their electric supply to end-use consumers. And some electric utilities are for-profit entities, which means their prices also include a return for the owners and shareholders. There are also costs associated with maintaining the security and operation of the electricity grid.
Basic Factors That Affect Electricity Prices
- Fuels — Coal is relatively inexpensive while natural gas tends to be more costly.
- Power plants — Construction and maintenance costs are greater for some kinds of power plants than others.
- Transmission and distribution lines — Maintaining and using the transmission system to deliver electricity contributes to the cost of electricity.
- Weather conditions — Rain and snow can provide water for hydro-power generation. Extreme heat can increase the demand for electricity for cooling.
- Regulations — In some states, prices are fully regulated by Public Service Commissions, while in others there is a combination of unregulated prices (for generators) and regulated prices (for transmission and distribution).
Why Do Electricity Prices Vary?
Electricity prices vary by customer type and over time. Prices are usually highest for residential and commercial consumers because it costs more to distribute electricity to them. Industrial consumers also use more and can take their electricity at higher voltages so it does not need to be stepped down.
These factors make the price of power to industrial customers closer to the wholesale price of electricity. The cost to generate electricity actually changes minute-by-minute. However, most consumers pay rates based on the seasonal average cost of electricity so they do not experience these types of price fluctuations.
Changes in prices generally reflect variations in electricity demand, availability of different generation sources, fuel costs, and plant availability. Prices are usually highest in the summer because more expensive generation is added to meet the higher demand.
The average retail price of electricity in the United States in 2008 was 9.74 cents per kWh. The average prices by type of customer were:
- Residential: 11.3¢ per kWh
- Transportation: 10.7¢ per kWh
- Commercial: 10.4¢ per kWh
- Industrial: 6.8¢ per kWh
What Does Location Have To Do With It?
Electricity prices vary over time and by locality due to the availability of power plants and fuels, local fuel costs, and pricing regulation and structures.
In 2008, the three states with the highest average price of electricity were:
- Hawaii: 29.20¢ per kWh
- Connecticut: 16.95¢ per kWh
- New York: 16.74¢ per kWh
States with the lowest average prices in 2008 were:
- West Virginia: 5.59¢ per kWh
- Wyoming: 5.68¢ per kWh
- Idaho: 5.70¢ per kWh
On average, electricity prices are highest in Hawaii because most of the electricity there is generated with fuel oil. Idaho usually has the lowest prices because of the availability of low-cost hydroelectric power from Federal dams.
Curious about Connecticut’s 10 largest power plants? Click HERE.
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