4 Factors that Determine Wholesale Electricity Prices
If you’re a large electricity buyer, this guide will help you get the best value for your money.
Electricity is typically sold wholesale before consumers purchase it at retail prices. If you’re a large industrial business, you may have a wholesale purchasing agreement for your power. That means you get wholesale electricity prices in exchange for buying a lot of power, skipping the middleman. Small and medium businesses can greatly benefit by understanding wholesale electricity prices as it can effect when they solicit bids for their long term energy supply contracts, or knowing if it is a good time to contact their electricity broker to renegotiate their contract with the retail supplier.
In 2017, the average electricity price for industrial businesses was 6.91¢ per kWh, while the average price for residential use reached 12.90¢ per kWh, says the U.S. Energy Information Administration.
If you’re buying wholesale, you probably want to know what industry factors to be aware of in order to get the most bang for your buck. That’s a wise move as wholesale electricity prices tend to fluctuate more than retail prices, which are often more fixed over a long period of time.
Wholesale electricity contracts can either have a fixed price or be tied to real-time electricity prices, explains the Electric Reliability Council of Texas (ERCOT). If you’re considering a fixed price contract, the factors affecting prices when you seal the deal might determine what you pay.
What makes wholesale electricity prices fluctuate? And how does that influence whether it’s a good time for a large industrial business to buy its power through a long-term fixed-price contract?
Fuel Price Fluctuations
The price of the fuels used to produce electricity influences the price of the electricity. For instance, if the power plant relies on natural gas for fuel, the cost of that resource will affect the cost of the electricity it produces. Likewise, if wind speeds are high and turbines are producing a lot of power for the grid, prices may drop. Thus, you could consider whether the cost of the fuels used by your supplier to produce electricity is likely to rise or drop in the near future.
Costs related to maintenance of infrastructure can drive up electricity prices. If a winter storm knocks down power lines, you might see a temporary surge in prices. Thus, you may want to consider how repairs or upgrades to the system are affecting electricity prices, then enter a contract when maintenance costs drop.
The total amount of electricity consumption among all customers affects prices as well, notes ISO New England, a nonprofit agency that oversees major elements of New England’s electric power system (similar to ERCOT in Texas). Total electricity demand tends to be highest in the summer, says the EIA, as more expensive supplemental sources of power are used then.
Depending on your state, regulations may set electricity prices, with a utility commission determining what you pay, explains the EIA. Other states regulate transmission prices but not the cost of generating power.
In many cases, the wholesale buyer and seller enter directly into an agreement, says PJM, an independent agency that oversees and directs major elements of the electric power system in 13 states and the District of Columbia. However, wholesale electricity prices can be set more broadly through an auction. “The clearing price for electricity in these wholesale markets is determined by an auction in which generation resources offer in a price at which they can supply a specific number of megawatt-hours of power,” PJM explains.
Electricity prices vary by location as well, and the real-time cost of electricity production can change from moment to moment throughout the day, the EIA notes. Tracking electricity costs in your state over a period of time will help you suss out the best time to enter a wholesale purchase agreement.