The Cost of Electricity


Wholesale and Retail electricity prices

by Valentin Uzunov

Each method for generating electricity has its costs which are determined up to the point of connecting to the electricity grid or a load (home, industry, commercial ). This wholesale value takes into account the initial capitaldiscount rate, as well as the costs of continuous operationfuel, and maintenance for the entire lifecycle of the station. To equitably compare electricity generation on a consistent basis between different power sources, one useful metric is the leveling cost of electricity (LCOE). LCOE is regarded as the average minimum cost at which electricity must be sold in order to break-even over the lifetime of the generation project.

Within the last ten years there has been a surge in the production of energy by renewable sources (solar, wind, geothermal, and hydro) are a result of increased demand across the globe, likely a reflection of the slowly building increased awareness of the connection between climate change and fossil fuels. Consumer demand drives competition which lower the cost of supply. However it was only last year that the cost of renewable energy generation became cheaper than conventional means, as reported by Lazard, a global finance and asset management company, in its latest annual Levelized Cost of Energy Analysis (LCOE 11.0) report "a continued decline in the cost of generating electricity from alternative energy technologies, especially utility-scale solar and wind" (Figure 1)

Figure 1. Renewable energy sources outnumber conversational sources at equivalent or lower Leveling Cost of Energy (LCOE). Source: www.lazard.com/perspective/levelized-cost-of-energy-2017/

The cost to supply electricity actually changes minute by minute at the utility level. However, most consumers pay rates based on a fixed seasonal cost rather than at wholesale prices. These prices vary between different types of utility customers. 

With annual average residential and commercial consumer prices in the US being higher than others, as voltages at which electricity is transmitted has to be regulated in populated areas for safety reasons. In 2016, the annual average whole price of electricity in the United States was 10.28¢ per kilowatt hour (kWh). The annual average prices by major types of utility customers were however 12.55¢ per kWh for residential, 10.37¢ per kWh for commercial, 9.48¢ per kWh for transportation, and 6.75¢ per kWh for industry.

The actual price the consumer cares about though is the retail price of electricity. Retail prices is what is listed on your bill. It depend predominantly on construction costs, finance, maintenance, and operating costs of the power station and the electric grid infrastructure necessary. For profit utilities also include a financial return for owners and shareholders in their electricity prices. Investopedia quotes this at " 8-10% based on statistics from Yahoo Business". Typically, high profit margins like these increase competition driving market price down. However the  extremely high level of capital investment necessary to establish infrastructure along with local and federal government restrictions on new projects, means that already established utility companies have essentially pseudo-monopolies in the regions where they are established.

According to US Energy Information Agency (EIA) the key factors which influence the retail price of electricity are : (figure 2)
Fuel, to operate electricity generators during high demand. This also means that electricity prices are subject to crude oil prices which power those generators
Power plants, construction, maintenance, and operating costs.
Transmission and distribution system, maintenance costs and repair
Weather condition, extreme temperatures increase demand driving prices due to required fuel consumption
Regulations, In some states, Public Service/Utility Commissions fully regulate prices, while other states have a combination of unregulated prices (for generators) and regulated prices (for transmission and distribution

Figure 2. The electricity retail price breakdown . Source: https://www.eia.gov/energyexplained/index.cfm?page=electricity_factors_affecting_prices

To put this into some context, the annual power consumption in the US ranges between states, from 505 kWh per month in Hawaii, where annual average electricity prices are around 23.87¢ per kWh (highest in the US). To 1240 kWh per month in Louisiana, where electricity is the cheapest in the nation, at 7.46¢ kWh. The national average annual energy consumption is 897 kWh per month at an average retail price of 10.28¢ per kWh (at time of writing. That is equivalent to a monthly bill of around $92 dollars. Looking at my January electricity bill, which was unusually high at $105 for 812 kWh, actually works out to be about $3.28 a day, compared to $5.61 on average around the US. I am glad to be living in Oregon, where retail electricity prices are within the lower quartile of the nation, at 8.83¢ kWh, and just under half of all energy produced in Oregon is renewable.

Electricity is ostensibly bountiful in the US, only a switch flip away. However for 900 million people around the world are without access to electricity, that is 27% of the world's population. Take a moment to consider the implication of living without electricity for even a day… A Oregon based organizations like Green Empowerment however are trying to make a difference to those people's lives. Part of their mission is to help rural communities, those most in need, establish locally owned and sustainable access to electricity. Utilizing small hydropower, biomass, biogas, wind and solar technologies that can be designed, built, and maintained locally. While their task is monumental, they have already made significant strides connecting over 30,000 people to renewable energy access since 1997.


You can make a difference too, join the movement by promoting sustainable energy use and sustainable living practices.