Electricity pricing

Based on Wikipedia: Electricity pricing

Your Electricity Meter Is Lying to You

Well, not lying exactly—but it's hiding something important. That kilowatt-hour price on your bill? It's really a compressed story about power plant financing, coal versus solar economics, government policy, weather patterns, and the precise moment you decided to run your dishwasher.

The price of electricity changes minute by minute.

This isn't like gasoline, where the station down the street posts a number and that's what you pay. Electricity is stranger. It can't be easily stored. It must be generated at the exact moment you consume it. And the cost of generating it depends on which power plants happen to be running right now, which itself depends on total demand across everyone in your region, which changes constantly as people wake up, turn on air conditioners, cook dinner, and go to sleep.

Who Decides What You Pay

In the United States, electricity pricing involves a multilayered governance structure that would make Byzantine bureaucrats nod approvingly. At the federal level, the Federal Energy Regulatory Commission—FERC—oversees wholesale electricity markets and the transmission of power across state lines. But the rates you actually see on your bill are set by your state's Public Service Commission, sometimes called a Public Utilities Commission, which regulates the utilities operating in your area.

This regulatory structure exists because electricity has historically been delivered by monopolies. When you flip a light switch, you probably have exactly one company that can sell you the electrons to illuminate it. Unlike choosing between Coca-Cola and Pepsi, you can't shop around for a different set of power lines to your house. This natural monopoly means the government steps in to prevent the utility from charging whatever it wants.

Some utility companies are for-profit entities, meaning their electricity prices include not just the cost of generating and delivering power, but also a financial return for shareholders. These companies, as you might imagine, have strong incentives to shape the regulatory environment in their favor. They can exercise considerable political influence to guarantee their profits and reduce competition from alternative power sources.

The Menu of Rate Structures

Gone are the days when everyone paid the same flat rate per kilowatt-hour. Modern electricity billing has evolved into a surprisingly complex menu of options, driven partly by the rise of renewable energy and partly by smart meters that can track exactly when you use power.

The simplest structure is still the flat rate: one price per kilowatt-hour, regardless of when you use it or how much. Simple to understand, simple to calculate.

Tiered rates change the price based on how much you consume. Use a little electricity? You pay the lower rate. Cross into higher tiers and the price per kilowatt-hour increases. The logic is straightforward: encourage conservation by making excessive use progressively more expensive. Some utilities flip this around, offering cheaper rates for higher usage to encourage consumption—useful when they have excess generating capacity.

Time-of-use rates charge you more during peak demand periods and less during off-peak hours. Historically, this meant electricity cost more during the day when factories hummed and office buildings blazed with fluorescent light, while nighttime rates dropped because demand fell. Run your washing machine at 2 AM and save money.

But here's where things get interesting: solar power is inverting this pattern.

The Solar Midday Effect

Traditional electricity grids relied on "baseload" plants—typically coal or nuclear—that run continuously and efficiently, supplemented by "peaker" plants that fire up during high-demand periods. Those peaker plants are less efficient and more expensive to operate, which is why peak electricity traditionally cost more.

Solar panels have disrupted this math entirely. They generate the most electricity precisely when the sun is highest—midday. In regions with significant solar capacity, this flood of cheap solar power during lunch hours has pushed wholesale electricity prices lower exactly when they used to be highest. The expensive peak has shifted to evening hours, when people come home, turn on lights and air conditioning, and start cooking dinner—just as the sun sets and solar generation drops to zero.

This shift explains why some utilities now offer time-of-use rates that flip the old pattern. Midday electricity might be cheap; evening electricity gets expensive.

Running Your Meter Backward

If you have solar panels on your roof, you've probably encountered net metering. This billing mechanism does something that sounds almost magical: when your panels generate more electricity than your home is using, your meter actually runs backward.

During sunny afternoon hours, a typical rooftop solar system produces more power than the home consumes. That excess electricity flows out to the grid, and the homeowner receives a credit on their bill. At night, when the panels produce nothing, the home draws power from the grid, and the meter runs forward again. At the end of the month, you pay only for your net consumption—the difference between what you drew from the grid and what you contributed to it.

This sounds like a pure win for solar homeowners, and it often is. But there's a catch that creates political controversy: the value of solar electricity on the wholesale market is typically less than the retail rate that net metering credits provide. In effect, net metering customers receive a subsidy paid for by everyone else on the grid—those who don't have solar panels, often because they rent their homes or can't afford the upfront installation costs.

This cross-subsidy has made net metering a battleground between solar advocates and utilities, between homeowners who've invested in rooftop panels and those who haven't.

Feed-In Tariffs: Europe's Approach

Net metering is distinctly American in its market-oriented approach. European countries more often use feed-in tariffs, a policy that takes a different philosophical stance toward renewable energy development.

Under a feed-in tariff—FIT for short—renewable energy producers receive a guaranteed price for their electricity over a long contract period, typically fifteen to twenty years. The utility is required by law to purchase this power at the agreed rate, regardless of what wholesale electricity prices are doing.

Feed-in tariffs were instrumental in making Germany a solar powerhouse despite its relatively cloudy climate. The guaranteed income stream reduced investment risk, making it economically viable for homeowners and businesses to install solar panels even when the technology was more expensive than it is today. Critics argue that feed-in tariffs can become expensive subsidies if the guaranteed price is set too high, but supporters credit them with accelerating renewable energy adoption worldwide.

What Electricity Actually Costs to Make

Beyond all these rate structures and policy mechanisms lies a more fundamental question: what does it actually cost to generate a kilowatt-hour of electricity?

Energy economists use a metric called the levelized cost of electricity—LCOE—to answer this question. LCOE calculates the total cost of building, financing, maintaining, and operating a power plant over its entire lifetime, then divides by the total electricity it produces. The result is a per-kilowatt-hour cost that can be compared across different technologies.

The LCOE of solar power has plummeted over the past decade, falling so dramatically that it has reshuffled the economics of the entire industry. As of recent years, about 70 percent of existing coal-fired power plants in the United States now produce electricity at a higher cost than newly built solar or wind installations. By 2030, projections suggest that every coal plant will be uneconomic compared to new renewables. Globally, more than 40 percent of coal plants were already operating at a financial loss by 2019.

This economic shift, more than any environmental regulation, explains why coal power is declining so rapidly.

But LCOE has a significant limitation that critics are quick to point out: it doesn't account for system costs. Solar panels generate electricity only when the sun shines. Wind turbines spin only when the wind blows. Integrating these variable sources into a grid that must provide stable, reliable power twenty-four hours a day requires backup generation, energy storage, and sophisticated grid management. These integration costs don't show up in LCOE calculations, which is why some analysts argue that LCOE comparisons between renewable and conventional sources can be misleading.

Why Hydropower Regions Pay Less

The generating mix of a utility—the combination of power sources it draws from—substantially affects what customers pay. Geography, it turns out, is pricing destiny.

Utilities with access to significant hydroelectric generation tend to have the lowest rates. Water falling through turbines is essentially free fuel, and once a dam is built, it operates for decades with relatively low maintenance costs. The Pacific Northwest, with its Columbia River system, has historically enjoyed some of the cheapest electricity in the country for exactly this reason.

Regions dependent on older coal plants face the opposite situation. These plants were often built decades ago with cost assumptions that no longer hold. Coal must be mined, transported, and burned continuously. Environmental regulations require expensive pollution controls. The plants themselves require constant maintenance. When these aging facilities compete against new solar farms with zero fuel costs, the economics become increasingly unfavorable—yet the utilities must still recover their original investments in these plants, keeping rates high even as alternatives become cheaper.

When Electricity Prices Go Negative

Perhaps nothing illustrates the strange economics of electricity better than this fact: sometimes the price goes negative. Not zero—actually negative. Producers will pay you to take their electricity off their hands.

This happens when supply overwhelms demand. On a particularly windy night when consumption is low, wind farms might generate more power than the grid can absorb. Since many power plants can't easily reduce their output—nuclear plants especially take hours or days to ramp down—and since electricity must be consumed the instant it's generated, the market price drops below zero as producers compete to offload power they can't store.

Negative prices are a signal of grid stress, a symptom of a system struggling to match supply and demand in real time. They're becoming more common as renewable energy capacity expands, highlighting the need for better energy storage solutions and more flexible grid management.

The Hidden Tax of Poor Power Quality

There's one more factor affecting electricity costs that most consumers never think about: power quality.

Electricity flowing through the grid isn't always clean and steady. Total Harmonic Distortion—THD—refers to interference in the electrical signal that can cause equipment to malfunction, vibrate, overheat, or in extreme cases, fail catastrophically. Think of it like static on a radio signal, except this static can damage motors and electronics.

Power factor is another technical measure that affects costs. It's the ratio of real power—the electricity actually doing useful work—to apparent power, which includes reactive power that oscillates back and forth without performing work. A low power factor means the system is drawing more current than necessary for the work being done. Larger currents require heavier wiring and more robust infrastructure to prevent energy loss, which is why industrial customers with low power factors often pay premium rates.

Utilities monitor power quality at the transmission level and deploy various compensation devices to mitigate problems. But these solutions add cost, and that cost ultimately flows through to consumer bills.

The Connection to Rate Increases

Understanding electricity pricing illuminates ongoing debates about energy policy. When states mandate that utilities source a certain percentage of their power from renewable sources, the utilities must comply regardless of the cost implications. Building new renewable capacity requires investment. Integrating variable generation requires grid upgrades. Retiring existing plants before they've paid off their construction loans creates stranded costs.

Whether these clean energy mandates produce higher electricity rates—and whether those higher rates are worth paying for environmental benefits—depends heavily on how you account for all these factors. The price on your electricity bill reflects not just the physical cost of generating and delivering power, but a dense layer of policy choices about what kind of energy system we want to build.

That's the story your meter isn't telling you.