What is the difference between wholesale and retail electricity?
When you purchase your electricity from your utility company or from your retail electricity provider, this is called retail electricity. These companies, and other entities, sell and purchase electricity on the wholesale market; it is called wholesale electricity.
Difference between wholesale and retail electricity
The price of wholesale electricity is usually lower than the price of retail electricity. This is because to the wholesale price of electricity must be added various charges in order to purchase the electricity and deliver it to your home.
These values are typical values, not true values. Each proportion will change depending on the time of year, the location, the utility and/or the supplier you are with.
For example, over the year 2013, the wholesale price of electricity was on average between 3.8 ¢/kWh and 6.6 ¢/kWh (depending on which US wholesale market region you are looking at), and the average US retail price of electricity for residential customers was 11.72 ¢/kWh, around 2 to 3 times higher.
Here we see the data for wholesale electricity markets in the US:
For more information on how wholesale markets function, please visit our page What is a wholesale market?
Here we see the average US retail price of electricity for residential customers, over time:
Why are they so different?
Wholesale and retail electricity prices are different due to additionnal charges described in the donut chart above. To the wholesale price of the market, one must add the purchasing charges, and then organize the delivery to the customer. Add the sales taxes and state charges such as low income assistance and renewable energy incentives, and you obtain the retail price of electricity.
Why do they not vary proportionally?
In the previous graphs, wholesale electricity has decreased in all US wholesale markets between 2008 and 2012. So why haven't retail prices done the same? This is because retail electricity is not necessarily purchased from wholesale markets. Retail electricity can come from the following transactions:
- Over-the-counter (OTC) transactions: these are usually deregulated, offer both standardized and customized products (products which fit the special requirements of the customer). OTC transactions are anonymous and are difficult to monitor by market authorities.
- power exchange (PX) transactions: these are regulated transactions, offer only standardized products, and are under the surveillance of energy market authorities such as FERC.
In regulated markets (markets which are not open to the competition), many utility companies own their own power plants, and the price of electricity is regulated by the state's Public Service Commission. In that case, electricity prices will vary less than on wholesale markets.