How Energy is Priced

We understand that electricity comes with a cost, but what factors go into the actual price of electricity?

We understand that energy costs money. The more electricity we use to power devices in our homes and businesses, the higher our bills will be at the end of the month. But how does energy pricing really work?

Energy prices are calculated on a per unit basis, which varies between types of energy. For example, electricity is measured in kilowatt-hours, or kWh, which is the measure of power used over time.

Several factors lead to the price of a unit of energy. As a commodity, supply and demand plays a large role. The more energy produced compared to the amount of energy in demand, the lower the price. When the amount of energy produced is lower than the amount of energy in demand, the price per unit rises.

However, supply and demand aren't the only factors that come into play. Extreme weather events, like storms or heat waves, can damage the grid, leading to power outages or costly repairs. Either could limit the amount of power available. And if there are supply chain issues, repairs could take longer because supplies aren't readily available.

World events and health crises can also affect the market. For a recent example, just look at how everything changed with the COVID-19 pandemic.

Fuel prices, especially natural gas, can affect electricity prices, too. Natural gas and other fuels are used to generate electricity, so higher fuel prices may result in higher generation costs.

For as large and diverse as the electric grid is, there are a lot of factors that can affect the price of a kilowatt-hour. Understanding the factors that go into energy pricing can help you make sense of the energy market.

Learn how your energy prices are distributed in your home by logging into your home energy profile today!