Energy Price Increases: How Does Electricity Pricing Work?
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Energy pricing is regularly in the news given the rate increases many people and businesses are experiencing. You might wonder why electricity is so expensive and why electricity prices are increasing. To answer both questions, it helps to know how electricity pricing works.
The price of fuel is one of the major influences of energy pricing and your residential electricity rates. Natural gas is one of the most used power plant fuels. The laws of supply and demand, together with regional factors, affect the price of natural gas and other fuels. When natural gas prices go up, you will likely see an electricity price increase, too.
As demand for a commodity like natural gas increases, so does the price. Similarly, when demand wanes, prices may fall. The amount of available supply can also affect your rates. If a surplus exists, prices may decrease; and when supplies run short, energy prices often increase. These are the largest factors to explain why your energy bill is so high.
Factors that influence energy price increases
Beyond supply and demand, other factors also influence energy pricing. These factors can drive an energy price increase and explain why electricity is so expensive today:
- Power generation availability. Demand may require additional generation plants to produce enough power to support consumption.
- Weather. Extreme temperatures and weather conditions are a common cause of power outages and increased energy demand.
- Supply chain issues. Replacement parts for turbines and other equipment can get held up between the manufacturer and the power plant.
- Grid infrastructure damage. If any part of the power grid suffers damage, it can limit the amount of power available to consumers.
- Climate change and natural disasters. Weather events are a common cause of power outages and increased demand.
- Grid infrastructure and distribution. It takes time to add high-voltage transmission lines and switches to the grid, so supply may not grow as fast as demand.
- World events. International events such as health crises and wars or border conflicts can disrupt energy production and distribution.
While the national grid is robust, if multiple variables combine, energy rates can go up fast. We have seen many of these occur in the last two years, and the resulting electricity price increases continue to linger. A fixed-rate energy plan can help you deal with the risk of market volatility so you can lock in your electric rate. You can also change your energy use patterns to use energy-hungry appliances when electricity rates are lowest.
Natural gas prices can also affect electricity prices
How do natural gas prices affect electricity prices? During many hours of the year, the power plants that set energy prices run on natural gas, and the cost of fuel is the single largest component of the overall cost of operating those plants. As more and more plants running on coal either close or convert to running on natural gas, the number of hours when gas plants set energy prices has increased in many regions of the U.S.
How energy choice can protect against a potential residential energy price increase
Energy choice changed many once-regulated markets in more than half the United States. What is energy choice? It is a market structure that gives you the ability to pick your own energy provider among several competitors. You might be able to cut your power bill by switching energy suppliers.
When suppliers, like Constellation, compete to become your energy provider, they need to offer competitive prices, a variety of electricity plans and customer-friendly options. Examples of these include fixed-rate plans that lock in your electric rate, protecting you from a potential future energy price increase.
Choosing the right energy plan for you is a matter of looking at your usage habits and needs. You may be able to save on your energy costs if you find one that fits.
With energy pricing going up, you can take control of how the energy price increase affects you. Conserving energy is important, but it is only part of the answer. Taking full advantage of energy choice and the variety of energy plans available may help you save money even as energy pricing and rates increase.