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Electricity pricing

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Electricity transport via high-voltage line
Electricity transport via high-voltage line

Electricity pricing (also referred to as electricity tariffs or the price of electricity) can vary widely by country or by locality within a country. Electricity prices are dependent on many factors, such as the price of power generation, government taxes or subsidies, CO
2
taxes,[1] local weather patterns, transmission and distribution infrastructure, and multi-tiered industry regulation. The pricing or tariffs can also differ depending on the customer-base, typically by residential, commercial, and industrial connections.

According to the U.S. Energy Information Administration (EIA), "Electricity prices generally reflect the cost to build, finance, maintain, and operate power plants and the electricity grid." Where pricing forecasting is the method by which a generator, a utility company, or a large industrial consumer can predict the wholesale prices of electricity with reasonable accuracy.[2] Due to the complications of electricity generation, the cost to supply electricity varies minute by minute.[3]

Some utility companies are for-profit entities and their prices include a financial return for owners and investors. These utility companies can exercise their political power within existing legal and regulatory regimes to guarantee a financial return and reduce competition from other sources like a distributed generation.[4]

Rate structure

In standard regulated monopoly markets like the United States, there are multilevel governance structures that set electricity rates. The rates are determined through a regulatory process that is overseen by a Public Service Commission. In addition, the Federal Energy Regulatory Commission (FERC) oversees the wholesale electricity market along with the interstate transmission of electricity. Public Service Commissions (PSC), which are also known as Public utilities commission (PUC), regulate utility rates within each state.

The inclusion of renewable energy distributed generation (DG) and advanced metering infrastructure (AMI or smart meter) in the modern electricity grid has introduced many alternative rate structures.[5] There are several methods that modern utilities structure residential rates:

  • Simple (or fixed) – the rate at which customers pay a flat rate per kWh
  • Tiered (or step) – rate changes with the amount of use (some go up to encourage energy conservation, others go down to encourage use and electricity provider profit)
  • Time of use (TOU) – different rate depending on the time of day
  • Demand rates – based on the peak demand for electricity a consumer uses
  • Tiered within TOU – different rates depending on how much they use at a specific time of day
  • Seasonal rates – charged for those that do not use their facilities year-round (e.g. a cottage)
  • Weekend/holiday rates – generally different rates than during normal times. among the few residential rate structures offered by modern utilities.

The simple rate charges a specific dollar per kilowatt hour ($/kWh) consumed. The tiered rate is one of the more common residential rate programs. The tiered rate charges a higher rate as customer usage increases. TOU and demand rates are structured to help maintain and control a utility's peak demand.[6] The concept at its core is to discourage customers from contributing to peak-load times by charging them more money to use power at that time. Historically, rates have been minimal at night because the peak is during the day when all sectors are using electricity. Increased demand requires additional energy generation, which is traditionally provided by less efficient "peaker" plants that cost more to generate electricity than "baseload" plants.[7] However, as greater penetration from renewable energy sources, like solar, are on a grid the lower cost, electricity is shifted to midday when solar generates the most energy.

An October 2018 study by UK energy supplier Octopus Energy demonstrated the benefits of time of use (TOU) tariffs in particular, with customers on its Agile price model found to have shifted electricity consumption out of peak periods by 28%, helping consumers save £188 per year compared to standard variable tariffs.[8]

A feed-in tariff (FIT)[9] is an energy-supply policy that supports the development of renewable power generation. FITs give financial benefits to renewable power producers. In the United States, FIT policies guarantee that eligible renewable generators will have their electricity purchased by their utility.[10] The FIT contract contains a guaranteed period of time (usually 15–20 years) that payments in dollars per kilowatt hour ($/kWh) will be made for the full output of the system.

Net metering is another billing mechanism that supports the development of renewable power generation, specifically, solar power. The mechanism credits solar energy system owners for the electricity their system adds to the grid. Residential customers with rooftop photovoltaic (PV) systems will typically generate more electricity than their home consumes during daylight hours, so net metering is particularly advantageous. During this time where generation is greater than consumption, the home's electricity meter will run backward to provide a credit on the homeowner's electricity bill.[11] The value of solar electricity is less than the retail rate, so net metering customers are actually subsidized by all other customers of the electric utility.[12]

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United States

United States

The United States of America, commonly known as the United States or informally America, is a country in North America. It consists of 50 states, a federal district, five major unincorporated territories, nine Minor Outlying Islands, and 326 Indian reservations. It is the third-largest country by both land and total area. The United States shares land borders with Canada to its north and with Mexico to its south. It has maritime borders with the Bahamas, Cuba, Russia, and other nations. With a population of over 331 million, it is the third most populous country in the world. The national capital is Washington, D.C., and the most populous city and financial center is New York City.

Federal Energy Regulatory Commission

Federal Energy Regulatory Commission

The Federal Energy Regulatory Commission (FERC) is the United States federal agency that regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce and regulates the transportation of oil by pipeline in interstate commerce. FERC also reviews proposals to build interstate natural gas pipelines, natural gas storage projects, and liquefied natural gas (LNG) terminals, in addition to licensing non-federal hydropower projects.

Public utilities commission

Public utilities commission

In the United States, it is a governing body of a utility. In Canada, it is a utility, not a regulatory body.

Distributed generation

Distributed generation

Distributed generation, also distributed energy, on-site generation (OSG), or district/decentralized energy, is electrical generation and storage performed by a variety of small, grid-connected or distribution system-connected devices referred to as distributed energy resources (DER).

Feed-in tariff

Feed-in tariff

A feed-in tariff is a policy mechanism designed to accelerate investment in renewable energy technologies by offering long-term contracts to renewable energy producers. This means promising renewable energy producers an above market price and providing price certainty and long-term contracts that help finance renewable energy investments. Typically, FITs award different prices to different sources of renewable energy in order to encourage development of one technology over another. For example, technologies such as wind power and solar PV are awarded a higher price per kWh than tidal power. FITs often include a "degression": a gradual decrease of the price or tariff in order to follow and encourage technological cost reductions.

Renewable energy

Renewable energy

Renewable energy is energy that is collected from renewable resources that are naturally replenished on a human timescale. It includes sources such as sunlight, wind, the movement of water, and geothermal heat. Although most renewable energy sources are sustainable, some are not. For example, some biomass sources are considered unsustainable at current rates of exploitation. Renewable energy often provides energy for electricity generation to a grid, air and water heating/cooling, and stand-alone power systems. Renewable energy technology projects are typically large-scale, but they are also suited to rural and remote areas and developing countries, where energy is often crucial in human development. Renewable energy is often deployed together with further electrification, which has several benefits: electricity can move heat or objects efficiently, and is clean at the point of consumption. In addition, electrification with renewable energy is more efficient and therefore leads to significant reductions in primary energy requirements.

Net metering

Net metering

Net metering is an electricity billing mechanism that allows consumers who generate some or all of their own electricity to use that electricity anytime, instead of when it is generated. This is particularly important with renewable energy sources like wind and solar, which are non-dispatchable. Monthly net metering allows consumers to use solar power generated during the day at night, or wind from a windy day later in the month. Annual net metering rolls over a net kilowatt-hour (kWh) credit to the following month, allowing solar power that was generated in July to be used in December, or wind power from March in August.

Solar power

Solar power

Solar power is the conversion of energy from sunlight into electricity, either directly using photovoltaics (PV) or indirectly using concentrated solar power. Photovoltaic cells convert light into an electric current using the photovoltaic effect. Concentrated solar power systems use lenses or mirrors and solar tracking systems to focus a large area of sunlight to a hot spot, often to drive a steam turbine.

Photovoltaics

Photovoltaics

Photovoltaics (PV) is the conversion of light into electricity using semiconducting materials that exhibit the photovoltaic effect, a phenomenon studied in physics, photochemistry, and electrochemistry. The photovoltaic effect is commercially used for electricity generation and as photosensors.

Price comparison by power source

The cost of electricity also differs by the power source. The net present value of the unit-cost of electricity over the lifetime of a generating asset is known as the levelized cost of electricity (LCOE). LCOE is the best value to compare different methods of generation on a consistent basis.

The generating source mix of a particular utility will thus have a substantial effect on their electricity pricing. Electric utilities that have a high percentage of hydroelectricity will tend to have lower prices, while those with a large amount of older coal-fired power plants will have higher electricity prices. Recently the LCOE of solar photovoltaic technology[13] has dropped substantially.[14][15] In the United States, 70% of current coal-fired power plants run at a higher cost than new renewable energy technologies (excluding hydro) and by 2030 all of them will be uneconomic.[16] In the rest of the world 42% of coal-fired power plants were operating at a loss in 2019.[16]

Electricity price forecasting

Electricity price forecasting (EPF) is a branch of energy forecasting which focuses on predicting the spot and forward prices in wholesale electricity markets. Over the last 15 years electricity price forecasts have become a fundamental input to energy companies’ decision-making mechanisms at the corporate level.

Since the early 1990s, the process of deregulation and the introduction of competitive electricity markets have been reshaping the landscape of the traditionally monopolistic and government-controlled power sectors. Throughout Europe, North America and Australia, electricity is now traded under market rules using spot and derivative contracts.[17][18] However, electricity is a very special commodity: it is economically non-storable and power system stability requires a constant balance between production and consumption. At the same time, electricity demand depends on weather (temperature, wind speed, precipitation, etc.) and the intensity of business and everyday activities (on-peak vs. off-peak hours, weekdays vs. weekends, holidays, etc.). These unique characteristics lead to price dynamics not observed in any other market, exhibiting daily, weekly and often annual seasonality and abrupt, short-lived and generally unanticipated price spikes.

Extreme price volatility, which can be up to two orders of magnitude higher than that of any other commodity or financial asset, has forced market participants to hedge not only volume but also price risk. Price forecasts from a few hours to a few months ahead have become of particular interest to power portfolio managers. A power market company able to forecast the volatile wholesale prices with a reasonable level of accuracy can adjust its bidding strategy and its own production or consumption schedule in order to reduce the risk or maximize the profits in day-ahead trading.[19] A ballpark estimate of savings from a 1% reduction in the mean absolute percentage error (MAPE) of short-term price forecasts is $300,000 per year for a utility with 1GW peak load.[20]

Electricity price forecasting is the process of using mathematical models to predict what electricity prices will be in the future.

Discover more about Electricity price forecasting related topics

Electricity price forecasting

Electricity price forecasting

Electricity price forecasting (EPF) is a branch of energy forecasting which focuses on predicting the spot and forward prices in wholesale electricity markets. Over the last 15 years electricity price forecasts have become a fundamental input to energy companies’ decision-making mechanisms at the corporate level.

Energy forecasting

Energy forecasting

Energy forecasting includes forecasting demand (load) and price of electricity, fossil fuels and renewable energy sources. Forecasting can be both expected price value and probabilistic forecasting.

Spot contract

Spot contract

In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement on the spot date, which is normally two business days after the trade date. The settlement price is called spot price. A spot contract is in contrast with a forward contract or futures contract where contract terms are agreed now but delivery and payment will occur at a future date.

Forward price

Forward price

The forward price is the agreed upon price of an asset in a forward contract. Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, the forward price can be expressed in terms of the spot price and any dividends. For forwards on non-tradeables, pricing the forward may be a complex task.

Electricity market

Electricity market

In a broad sense, an electricity market is a system that facilitates the exchange of electricity-related goods and services. During more than a century of evolution of the electric power industry, the economics of the electricity markets had undergone enormous changes for reasons ranging from the technological advances on supply and demand sides to politics and ideology. A restructuring of electric power industry at the turn of the 21st century involved replacing the vertically integrated and tightly regulated "traditional" electricity market with multiple competitive markets for electricity generation, transmission, distribution, and retailing. The traditional and competitive market approaches loosely correspond to two visions of industry: the deregulation was transforming electricity from a public service into a tradable good. As of 2020s, the traditional markets are still common in some regions, including large parts of the United States and Canada.

Deregulation

Deregulation

Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy. Economic regulations were promoted during the Gilded Age, in which progressive reforms were touted as necessary to limit externalities like corporate abuse, unsafe child labor, monopolization, pollution, and to mitigate boom and bust cycles. Around the late 1970s, such reforms were deemed burdensome on economic growth and many politicians espousing neoliberalism started promoting deregulation.

Derivative (finance)

Derivative (finance)

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.

Load profile

Load profile

In electrical engineering, a load profile is a graph of the variation in the electrical load versus time. A load profile will vary according to customer type, temperature and holiday seasons. Power producers use this information to plan how much electricity they will need to make available at any given time. Teletraffic engineering uses a similar load curve.

Seasonality

Seasonality

In time series data, seasonality is the presence of variations that occur at specific regular intervals less than a year, such as weekly, monthly, or quarterly. Seasonality may be caused by various factors, such as weather, vacation, and holidays and consists of periodic, repetitive, and generally regular and predictable patterns in the levels of a time series.

Mean absolute percentage error

Mean absolute percentage error

The mean absolute percentage error (MAPE), also known as mean absolute percentage deviation (MAPD), is a measure of prediction accuracy of a forecasting method in statistics. It usually expresses the accuracy as a ratio defined by the formula:

Public utility

Public utility

A public utility company is an organization that maintains the infrastructure for a public service. Public utilities are subject to forms of public control and regulation ranging from local community-based groups to statewide government monopolies.

Mathematical model

Mathematical model

A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used in the natural sciences and engineering disciplines, as well as in non-physical systems such as the social sciences. The use of mathematical models to solve problems in business or military operations is a large part of the field of operations research. Mathematical models are also used in music, linguistics, and philosophy.

Power quality

Excessive Total Harmonic Distortions (THD) and low power factor are costly at every level of the electricity market. The impact of THD is difficult to estimate, but it can potentially cause heat, vibrations, malfunctioning and even meltdowns. The power factor is the ratio of real to apparent power in a power system. Drawing more current results in a lower power factor. Larger currents require costlier infrastructure to minimize power loss, so consumers with low power factors get charged a higher electricity rate by their utility.[21] Power quality is typically monitored at the transmission level. A spectrum of compensation devices[22] mitigate bad outcomes, but improvements can be achieved only with real-time correction devices (old style switching type,[23] modern low-speed DSP driven[24] and near real-time[25]). Most modern devices reduce problems, while maintaining return on investment and significant reduction of ground currents. Power quality problems can cause erroneous responses from many kinds of analog and digital equipment.

Phase balancing

The most common distribution network and generation is done with 3 phase structures, with special attention paid to the phase balancing and resulting reduction of ground current. It is true for industrial or commercial networks where most power is used in 3 phase machines, but light commercial and residential users do not have real-time phase balancing capabilities. Often this issue leads to unexpected equipment behavior or malfunctions and in extreme cases fires. For example, sensitive professional analog or digital recording equipment must be connected to well-balanced and grounded power networks. To determine and mitigate the cost of the unbalanced electricity network, electric companies charge by demand or as a separate category for heavy unbalanced loads. A few simple techniques are available for balancing that require fast computing and real-time modeling.[26]

Source: "Electricity pricing", Wikipedia, Wikimedia Foundation, (2022, November 25th), https://en.wikipedia.org/wiki/Electricity_pricing.

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References
  1. ^ Stanley Reed (22 September 2021). "Here's What's Behind Europe's Surging Energy Prices". The New York Times. Retrieved 24 September 2021. High carbon taxes are also stoking power prices
  2. ^ Weron, Rafał (2014). "Electricity price forecasting: A review of the state-of-the-art with a look into the future". International Journal of Forecasting. 30 (4): 1030–1081. doi:10.1016/j.ijforecast.2014.08.008.
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  10. ^ "Feed-in Tariff Resources | Department of Energy". www.energy.gov. Archived from the original on 4 May 2018. Retrieved 3 May 2018.
  11. ^ "Net Metering | SEIA". SEIA. Retrieved 3 May 2018.
  12. ^ Rethinking The rationale for Net Metering: Quantifying subsidy from non-solar to solar customers. Alexander, Brown, and Faruqui. http://ipu.msu.edu/wp-content/uploads/2017/09/Rethinking-Rationale-for-Net-Metering-2016.pdf
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  19. ^ Weron, Rafał (2006). Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach. Wiley. ISBN 978-0-470-05753-7.
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