Below, we list the general factors that might impact electricity prices, and that might cause them to increase or decrease.
This guide might complement a separate guide containing case studies of the factors that impact electricity prices in specific countries and regions around the world
Summary – The Different Factors That Might Impact Electricity Prices
Factors That Can Impact Electricity Prices
Supply & Demand Of Electricity
Investment In Infrastructure & Networks
Government Policy & Government Factors
Profit Motive Of Utility Companies (& Retailers)
The Cost Of Different Energy Sources
Using Different Energy To Deliver Electricity As A Service
Technical Factors
Other Factors
A Range Of Factors Can Impact Electricity Prices, & The Whole Power Network Should Be Considered In Identifying These Factors
We explain this conclusion in more detail in the guide below
Factors Impacting Electricity Prices Can Differ Between The Different Individual Geographic Regions
In addition to the general factors that can impact electricity prices, there might be different local factors impacting electricity prices in each individual country, or in each individual State or city within a country.
For example, electricity rates, and rate structures can differ between the individual cities, States and countries.
Additionally, general government energy policy, the introduction of renewable energy schemes (supported by taxes and levies), not having enough low cost energy sources in the energy market, or, not enough overall competition in the energy market, can all impact electricity prices in any individual country or region.
Some countries and regions may also have geographic challenges to deal with, in having to pay a heavy upfront cost to install transmission lines (and poles and wires) to transport renewable energy from solar and wind for example. This might be the case in places like the MidWest int he US, and Australia (where these costs might make up a larger % of the power bill there).
Some Factors May Have A Bigger Impact On Electricity Prices That Others At Any One Time
Some factors can impact prices much more than others at any one time
It’s also possible multiple factors can impact prices at once
Short Term vs Long Term Electricity Price Changes
Price changes can be temporary (changing hourly or daily), or more permanent and longer term (lasting months and years)
Due to the complications of electricity generation, the cost to supply electricity varies minute by minute (wikipedia.org)
Direct vs Indirect Factors That Can Impact Electricity Prices
Apart from direct factors, there can also be more indirect factors that impact electricity prices
For example, macroeconomic factors like a downturn or recession in the economy can impact things such as investment, supply, and demand in energy and electricity
Other Notes
– Residential, commercial, and industrial customers may pay different prices for electricity for different reasons
– There’s a difference between the wholesale price of electricity, and the retail price of electricity
Supply & Demand Of Electricity
Like with other goods or services, supply and demand can impact prices.
Things to consider when it comes to supply and demand of electricity can include:
– Total supply and demand
– Peak supply and demand (i.e. during peak periods of the day, or year)
– Timing supply with demand, as electricity has to be used when it’s generated, unless it’s stored in a battery or somewhere else
A few examples of how supply and demand can impact electricity prices are:
– Surplus electricity fed into the electricity grid can lead to suppliers having to sell their electricity at low prices in order to be able to get rid of it
– Where demand for electricity from the grid is greater than the power being supplied into the grid from different energy sources, this may push the price of electricity up
Investment In Infrastructure & Networks
Infrastructure is required to generate, transport, and distribute electricity.
It includes things like transmission lines and poles, convertors, electricity metering, and the power grid itself (it’s construction, it’s design, it’s capability, and so on)
Infrastructure can be built new, maintained, repaired or replaced, modified or upgraded, and so on.
There’s a cost to doing all of this, and infrastructure can be expensive.
Networks in some regions have much higher infrastructure costs than others. Some countries for example have to transport electricity over long distances (or greater amounts of land), and require more infrastructure to do this.
These infrastructure costs can ultimately be built into the standard costs for a retail electricity bill, and increase the average price paid for electricity by the average homeowner.
askjaenergy.com also notes that:
… the price of electricity [in Iceland] is higher [when] transmission costs [are] included.
Government Policy & Government Factors
General government policy (of the political parties in office) can heavily impact the energy sector and electricity generation industry.
Government factors involve anything developed and implemented by the government that impacts the energy sector or electricity generation (i.e. regulates, controls, or support certain parts of the electricity generation industry)
But, examples of specific tools could include regulations, energy standard portfolios (in places like California, an energy portfolio might set a minimum amount of each type of renewable energy that has to be purchased for electricity), subsidies, tariffs (such as feed in tariffs), credits, schemes, taxes, carbon pricing, and so on
Taxes for example might increase the cost of a particular energy source, or the local energy system as a whole, which may increase the price of electricity
Feed in tariffs for energy sources like solar on the other hand may provide people with a ‘credit’ or ‘cost saving’ on their electricity bill when they feed electricity into the grid from a private solar setup
Tariffs may take other forms too though
The government may have to consider balancing having free and competitive energy market with the tools they implement in supporting/promoting or penalising different energy sources
Multilevel governance structures can also impact electricity prices in some markets.
This might be the case in the US.
From wikipedia.org:
[The US is a standard regulated monopoly market, where there are multilevel governance structures to set electric rates.]
The rates are determined through a regulatory process that is overseen by a Public Service Commission [and the FERC] oversees the wholesale electricity market along with the interstate transmission of electricity.
[The PSC] … regulate the retail rates of utilities within each state [and] Different utility types are regulated differently in each state as well.
There are different levels and tiers of government – local, State and national.
Ideally, energy and electricity policies and tools between the different tiers of government are communicated or co-ordinated in some way in the short and long term.
Profit Motive Of Utility Companies (& Retailers)
Some utility companies are for-profit companies.
Therefore, their prices may be influenced by their business interests, which could be cost, revenue, or profit related, just as a few examples
There might be a range of things these companies might do to pursue their business interests
wikipedia.org gives an example of how utility companies might pursue a financial return:
… utility companies can exercise their political power within existing legal and regulatory regimes, to both guarantee that financial return, and, reduce competition from other sources, such as distributed generation
[Distributed generation includes sources such as rooftop solar and residential solar – essentially sources that aren’t commercial size or utility]
Beyond utility companies who supply electricity, there are electricity retailers who buy wholesale electricity from suppliers and on-sell it to household consumers as retail electricity.
Retailers may also need to pursue business interests
For example, they have costs such as admin, sales staff, etc. which they need to cover for, and they also need to make money.
These costs and this profit margin might be added to the wholesale price of electricity.
The Cost Of Different Energy Sources
Different energy sources have different key costs, such as:
– Capital costs
– Operating costs
– Lifecycle costs
We outline these costs for the different energy sources in another guide.
The costs for different energy sources might be factored into the price the end consumer has to pay for electricity.
Using Different Energy To Deliver Electricity As A Service
This is something we’ve discussed in other guides.
But, the cost to use different energy sources to generate electricity doesn’t just include capital costs and operating costs.
Electricity is delivered using a local energy system (i.e. the local electricity grid), and, different energy sources have different requirements to be able to provide electricity in that system.
So, energy sources don’t standalone by themselves – they deliver electricity as a service in an overall energy system.
The requirements of some energy sources within the system, such as some variable renewable energy sources like solar and wind, might create additional costs compared to other energy sources.
For example, solar and wind may sometimes need backup energy, or expensive battery storage (electricity can’t be stored as easily as gas – so, it generally needs to be used at the same time as it is produced, unless it’s stored in a battery) – both of which be additional costs.
Additionally, because the power output from solar and wind can be variable/intermittent, and to prevent issues like overcapacity or grid instability, other energy sources may have to turn on and shut off, ramp up and down, and might not be able to operate at capacity sometimes.
This may impact the ability of these other energy sources to cover operating costs, and make a profit or get a return on investment.
They may have to charge more for the electricity they supply as a result.
As another example, where solar or wind are producing surplus energy, sometimes that electricity has to be sold or exported/traded very cheaply to offload it.
On the flip side to that, having to import electricity when there’s a deficit might be expensive in some instances.
It’s possible that in some instances, some renewables might decrease electricity price volatility.
This could be the case where countries are reliant on importing energy resources from other countries and use them for electricity generation.
renewableenergymagazine.com mentions: ‘[Using renewables …] means the price of electricity isn’t susceptible to changes in the price of fuels, like it is with natural gas or coal’
Overall, the cost to use different energy sources to deliver electricity might be weighed up against the other potential benefits and drawbacks of using each energy source.
Technical Factors
There might be a range of technical factors that have the potential to impact electricity prices.
Some examples might include:
– Phase Balancing
Where an electricity network has unbalanced loads, an electricity company may charge by demand to balance them
– How Power Is Transmitted (i.e. at different currents, voltages, etc)
Different reports indicate that the current or voltage that power is transmitted at can impact cost differently.
Transmitting power at high current and low voltage for example might make a power system more efficient and reduce infrastructure costs, in addition to providing other benefits.
Larger currents require costlier infrastructure to minimize power loss, so consumers with low power factors get charged a higher electricity rate by their utility (wikipedia.org)
Other Factors
There can be a range of other miscellaneous factors that impact electricity prices.
Some examples might include:
– Power Outages
Power outages can be caused by a range of things.
A storm is one example, where trees can fall on power lines that aren’t buried underground.
A power outage can disrupt parts of the power supply.
This disruption can have a flow on effect to other parts of the energy system and power grid that can drive up prices.
– The Economy, & Economic Conditions
Economic conditions can impact all sectors and industries, in particular energy and electricity generation.
The flow on effect from different types of economic conditions can impact electricity prices.
– Inflation
Inflation is another economic factor that can make the price of all goods and services increase, including electricity
– Importing & Exporting Electricity
Some countries import or export electricity between electricity grids.
Where there are deficits or surpluses of electricity domestically, importing or exporting electricity may impact the price that electricity is bought or sold for, and the price the end consumer pays.
The arrangements and deals cities have with other cities they sell or buy electricity to/from also impact price.
– World Events
Where countries rely on importing a certain energy source, world events that impact access to, or the supply of that energy source, can lead to volatile prices.
– Being An Island Country, Or An Isolated Or Remote Region
Island countries might have some of the highest electricity prices in the world
The Solomon islands for example is an island country
Hawaii is an island group off the US mainland
Parts of Alaska can be remote
All three pay higher than average electricity prices.
Island countries, and isolated or remote regions may have some in-built limitations in terms of providing more affordable electricity
– Local Weather & Climate
The local weather or the climate may impact electricity prices directly where solar and wind depend on sunlight and wind to deliver power.
Power surpluses and deficits impact supply, which can impact electricity prices
The climate may also impact electricity prices indirectly in hotter than average or cooler than average places.
Hot weather usually means a demand for cooling, and cold weather usually means a demand for heating.
Both of these things can drive up demand for electricity, and with it, electricity prices
– The Quality & Reliability Of The Overall Electricity System
An indirect factor.
But, some cities and countries with higher quality or more reliable power supplies may sometimes invest more money into their power system and infrastructure as a result.
These investments costs may be passed onto consumers in the form of higher electricity prices.
Ultimately, A Range Of Factors Can Impact Electricity Prices, & The Whole Electricity Grid Should Be Considered
Electricity prices can be impacted by factors other than just the energy sources they come from.
Additionally, the whole energy network should be considered when identifying these factors.
Factors That Can Impact Electricity Prices Other Than Just The Energy Sources That Generate Electricity
Ultimately, there is no single one factor that impacts electricity prices
A range of factors can impact electricity prices at any one time, with each factor impacting prices a different amount
Some factors may impact prices temporarily (or over the short term), whilst some may impact them more permanently
The energy sector is large, and the electricity generation industry specifically has many parts to it too.
There are ultimately many factors, and several groups (electricity suppliers/operators, retailers, consumers, etc) that can impact prices internally within the electricity generation industry.
There’s also many factors (such as the economy) and several groups (fossil fuel companies, the government, etc.) that can impact prices externally
From finder.com.au:
Electricity prices have become a political hot potato …
Electricity retailers find fault with governments, and renewable energy advocates point the finger at … old fossil-fuel generators.
The right-wing commentariat blames renewables, while the federal government blames everyone but itself.
The truth is there is no silver bullet [and] No single factor or decision is responsible for electricity prices … Rather, it is the confluence of many different policies and pressures at every step of the electricity supply chain.
energycouncil.com.au expresses how a range of factors impact electricity prices:
The price of energy depends on a range of different supply and demand conditions, including the geopolitical situation, network costs, environmental protection costs, severe weather conditions, and levels of excise and taxation.
Considering The Whole Electricity Grid
The EIA via wikipedia.org provides a good summary of how electricity prices are set and changed:
Electricity prices generally reflect the price to ‘build, finance, maintain, and operate power plants and the electricity grid’
The whole power grid and energy system they work in has to be considered.
Residential vs Commercial vs Industrial Electricity Customers
Residential, commercial and industrial customers may pay different electricity tariffs/prices
There are different reasons for this, such as the economics of stepping down voltages, political lobbying, and the efficiency of the services to each type of customer
Wholesale vs Retail Electricity Prices
There’s a difference between wholesale electricity prices, and retail electricity prices
Wholesale prices might be cheaper as retailers purchase wholesale electricity, and then add various charges to it before delivering it to homes a retail electricity
Other Guides On Electricity Prices
Case Studies Of Factors That Impact Electricity Prices In Different Individual Countries
Does Renewable Energy Increase Or Decrease Electricity Prices?
Countries With The Most Expensive Electricity Prices, & Also The Cheapest
Sources
1. https://en.wikipedia.org/wiki/Electricity_pricing
2. https://www.energycouncil.com.au/analysis/electricity-prices-around-the-world-what-is-the-impact-of-renewable-charges/
3. Various ‘Better Meets Reality’ guides
4. https://www.worldatlas.com/articles/electricity-rates-around-the-world.html
5. https://www.renewableenergymagazine.com/emily-folk/the-many-economic-benefits-of-renewable-energy-20190312
6. https://askjaenergy.com/2017/03/17/rising-power-prices-in-iceland/
7. https://www.finder.com.au/australian-electricity-prices-rising-decade
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