In deregulated markets, the price of electricity depends on 2 fundamental variables: supply and demand. The price of electricity varies on a regular basis. Here we analyses the fluctuations in the price of electricity.
What factors affect the price of electricity
The price of electricity depends on the law of supply and demand. The price of electricity varies on a regular basis. More specifically, the factors which may affect the price of electricity are:
- The price of the fuel. Fossil fuels, nuclear fuel, and other types of fuel has a certain cost of extraction, and treatment for it to be used in a power plant. This will influence the price of the fuel.
- The availability of the resource. Wind (for wind turbines), sunlight (for solar panels), or water in rivers (for hydroelectric plants), all of these will be more or less available, mostly due to weather. If their availability is low, then the electricity they produce will be more expensive.
- Operation of power plants. Different types of power plants are operated in different manners. This operation & maintenance has a cost.
- The grid. the transportation of the electricity from the point of production to the consumer is done through the transmission and distributions grids, and this has a cost. The farther away the source of electricity is from the point of demand, the more expensive the electricity will be. Also, modern methods of electricity production, such as wind farms and solar panels, require modernized energy grids, which may incur additional costs on the long term.
- Regulation. In the US, some energy markets are regulated and some are deregulated. In regulated markets, the price of electricity is decided by the state's PSC (Public Service Commission). If a resource becomes more less available, rendering the electricity more expensive to produce, utility companies must make a request to the state's PSC to increase the price of electricity, or else they may face bankruptcy.
Seasonal changes strongly affect electricity prices
Electricity prices for residential customers in the US change by more than 10% between winter and summer. Contrarily to popular thought, electricity prices in the US are highest in summer and lowest in winter. This is because in most states, the weather is most extreme during summer months, where temperatures reach heights which require large amounts of energy for air conditioning.
Here we see that the residential price of electricity peaks in between the months of June and September, and is the lowest towards the month on January.
Electricity prices with or without inflation
Did you know?
Energy prices tend to increase every year, but this is due to inflation. This means that it is not only the price of energy that increases each year. The price of any good for sale will increase due to inflation. In order to make a proper analysis of the energy prices increase, one must use inflation stabilized data.
The red curve shows the actual variation of electricity prices in comparison with previous years. It has actually stayed rather stable over the past 20 years.
What does this mean for deregulation?
So does this mean deregulation was good? The previous graph includes the whole of the US, regulated and deregulated states alike. But here is a graph averaging the electricity prices of the fully deregulated states: CT, DC, DE, IL, MA, MD, ME, MI, NH, NJ, NY, OH, OR, PA, RI and TX.
Prices go down during the deregulation
The actual application of the deregulation came progressively between 1998 and 2000 (utility by utility). It appears that the preparation of a deregulation brought the prices of electricity down. Even before the competitive suppliers appeared, prices were already coming down. This is nevertheless still an effect of the deregulation: the deregulation caused the utility companies to bring their prices down in anticipation of the coming competition.
Prices increase soon after
Starting in 2005, the retail prices of electricity started to increase again. Due to the previous drastic decrease in the electricity prices, prices had to come back to their original state so that the companies remained profitable. In 2009, this increase stopped, and now we find ourselves back on a decreasing slope. All in all, there have been variations, but as the energy markets deregulated, energy prices globally decreased, and remain today lower (taking inflation into account) than they were before the deregulation.