Better understanding the breakdown of power pricing, as well as observing your own power usage habits, is essential to identifying cost savings opportunities and cutting back on unnecessary energy consumption. Get more familiar with the components that make up your electric bill!
If you own or rent any kind of property, you are all-too familiar with the electric bill that lands on your doorstep every month. Or are you?
Electrical power systems are one of the most impactful developments in human evolution. These systems truly are the backbone of modern life. Think about how many times a day you depend on power to turn on the lights and utilize technology.
For something so crucial to our daily lives, you’d think we would have a better understanding of how it works. Yet, most of us don’t give power too much thought. When we flip the switch, we expect things to turn on – and that’s really all we care about. Except when it comes time to pay for it, of course.
But even when we receive that electric bill in the mail, there seems to be little transparency. What exactly are we being billed for? How is that total figure being calculated? What are the best ways to lower that cost?
Next time you receive your bill, give it a more thorough look-over. There is much to learn from your electric bill, and it’s worth paying attention to.
Better understanding the breakdown of power pricing, as well as observing your own power usage habits, is essential to identifying cost savings opportunities and cutting back on unnecessary energy consumption.
Here’s what you need to know about the line item components that make up most electricity bills:
Distribution Charges –
These are the costs for the local utility (or poles and wires company) to maintain the distribution infrastructure. The distribution system is made up of lower voltage lines, typically the power lines you see around town connecting power to bulidings. These charges always apply and are not part of the bill a competitive retail supplier is responsible for. These charges are determined by the local utility and regulators.
This component is the cost of maintaining and upgrading the high voltage transmission system. The transmission system is made up of high voltage and typically long-distance infrastructure for moving power. You may see transmission corridors cross highways when you are driving, with tall towers and wires high above the ground. Depending on the market, this component may be the responsibility of the supplier or the utility. These charges are highly regulated but typically very uncertain as you move further into the future. Transmission and capacity costs are based on the customer’s usage at times when the total load on the grid is high. One way to manage costs is to lower usage during peak demand times.
All of the markets with retail choice, except ERCOT, have some type of capacity market, which pays generators for being there to produce electricity. Capacity charges are the responsibility of the retail supplier; however, capacity prices are generally set in advance and are charged to all load in the same way. Capacity for electricity is similar to the maximum horsepower of your car engine, and you pay for that horsepower even if you do not use it. Capacity markets are designed to ensure there is enough electric generation to meet demand.
This is the cost of the electricity and is the responsibility of the supplier. Energy is the cost component where suppliers have the most options to manage their costs, for example by hedging in the wholesale market in advance, or scheduling load into the Day-Ahead market with the ISO. This is the component where costs are the most volatile, as the forward market where suppliers hedge load moves up and down. This is also the largest cost component on the supplier side of a customer’s bill. When you hear about prices moving, it is the energy prices these discussions refer to. While most other costs are the same for all load because they are regulated, energy costs do vary because there are so many options to manage them.
Suppliers are responsible for the cost to serve load; however, electricity is physically lost on the distribution system before it is measured at a customer’s meter. Therefore, suppliers have to gross up the price charged to customers to account for the difference in the customer’s metered usage and the volume the supplier is charged due to losses.
This is the smallest and most varied component of your electric bill, covering costs of serving load and balancing the grid. These include reserves, which are when the grid operators pay generators to be on standby to provide any necessary power if other generators or transmission lines experience issues. There are also operating costs for the ISOs and costs for keeping the physical grid operating as needed, such as voltage support and managing reactive power needs. Suppliers are typically responsible for ancillary costs and there is limited information about how much these costs will be in advance.
Renewable Portfolio Standards (RPS) –
These costs are based on state requirements to procure some percentage of electricity from renewable sources. These charges can be on the distribution side of the bill, however, they are typically on the supply side. How much RPS compliance costs depends on the state requirements and can change abruptly if those requirements change. The costs of complying with the standards are fairly consistent across suppliers and, barring any regulatory or legislative changes, are known in advance.
Although these line items are present in most electricity bills within deregulated markets, your bill may include other components as well depending on what kind of customer you are (residential, commercial, or industrial), what ISO and state you are operating in, which rate class you fall under, and more.
If you have more questions about your electricity bill, feel free to reach out – our team would love to help.
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