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How Utility Bills Get Set

The lowdown on how electricity rates work in different markets

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Electricity Bill Fluctuations

There is nothing more frustrating than finding an electricity bill in your mailbox that has almost doubled in price from the previous month. While temperature fluctuations that made you turn your thermostat up or down might be responsible for some of that increase in price, consumers often don’t understand how their utility bills get set or how electricity rates function. In some cases, a change in supplier, a massive drought that dropped river levels and affected hydroelectric plants, or a host of other external conditions could be responsible for the changes in your electricity bill.

Knowing how utility bills are set and how electricity rates are determined is extremely important, especially now that there are increasing opportunities for homeowners and residents to change energy suppliers and even opt into renewable energy programs such as Community Solar projects.

Understanding Your Electricity Bill

For many people, the only thing known about the energy that powers their homes is related to the monthly utility bill that they have to pay to keep their lights on and home comfortable. Understanding the numbers on your electricity bill is a good starting point for grasping how the electricity industry works on a larger scale.

In the United States, the electricity that is charged to the consumer is measured by kilowatt hours (kWh), or 1,000 watts of energy used for one hour. For clarification, ten 100-watt light bulbs turned on for one hour would consume 1 kWh of electricity. The average price for 1 kWh of electricity in the United States is $0.12, though there are extremes such as over 33 cents per kWh for the state of Hawaii. Similarly, the average monthly household electricity consumption in the U.S. is 867 kWh per month. The size of your home, the climate you live in, and the energy efficiency standards of your home construction will all affect the total amount of electricity you require. Your energy bill from your utility or retail electric supplier will share your home’s energy consumption each month – it is a great place to start to understand how much energy is typically used by your home.

grey house iconA house that uses 867 kWh of energy charged at $0.12 per kWh would be charged a total of $104.04 for the energy used. Utility companies also include other charges separately from the energy supply charge, including a monthly distribution charge that covers meter reading, equipment maintenance, and other pertinent costs. You may also see taxes and other fees.

Generally speaking, the power supply charge is between one-quarter to half of your total bill. This power is supplied by either the local utility or other competitive retail electric suppliers.

While consumers throughout the U.S. used to be forced into sticking with the main utility company in the area, energy deregulation has allowed residents across the country to have more of a choice in searching for providers of their electricity. States like Massachusetts and Illinois both benefit from consumer choice and deregulation, but too often, retail electric suppliers have hindered trust with hidden fees, gimmicky teaser rates and green power premiums.

Grey icon of a bill with a checkmark next to itThe delivery charges associated with your electricity bill are largely determined by where you live and include distribution, transition, and transmission charges. Oftentimes, the development of renewable energy sources and energy efficiency programs are subsidized through delivery charges billed to consumers. Distribution charges are not dependent on the company you choose for supplying your energy and can only be reduced through reducing your total household energy usage.

How Electricity Rates are Set

Now that we have a basic understanding of what those numbers on your electricity bill actually mean, it will be easier to understand the factors that can affect electricity prices across different markets and different regions.

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 (the complex system of power transmission and distribution lines). Some for-profit utilities also include a financial return for owners and shareholders in their electricity prices.

There are also several external conditions that can affect the costs of electricity, the most important of which is the cost of fuels. Despite major recent gains in renewable energy production across the United States, fossil fuels continue to dominate our electricity production with fossil fuel sources accounting for 63 percent of total electricity production. As fossil fuels continue to become harder to obtain due to geopolitical factors, proposed carbon taxes (as part of the fight against climate change), and growing scarcity (they are non-renewable resources, after all), the price of electricity has potential to skyrocket.

In fact, a University of Stanford study finds that “as the production (of fossil fuels) increases due to a growing trend in consumption of energy, the supply of these fossil fuels will start to diminish. As, supply goes down and demand goes up, prices will increase dramatically.

Recent trends in the national cost of electricity seem to prove this idea as the retail residential electricity rates have steadily increased across the country by about 15% over the last 10 years. Furthermore, it is worth mentioning that the actual cost to provide electricity fluctuates on a minute-by-minute basis. The wholesale price of electricity on regional grids always reflects the constantly changing real-time cost for supplying electricity. While consumers are often protected from this constant fluctuation through paying the seasonal average of cost utility companies incur to provide electricity, electricity prices will vary greatly on a monthly basis.

Why Opt for Solar Energy? (No roof required!)

Opting to make the transition to solar energy is one way to avoid the increasing volatility of electricity prices. The rays of the sun hitting the earth are amazingly consistent and offer a steady source of energy that can provide a secure source of renewable and clean energy to power our society. Participating in a Community Solar program can help people insulate themselves against the fluctuations that are so common in the electricity industry.

Why Clearway Community Solar?

Clearway Community Solar is one company that is committed to building local community solar farms across Massachusetts, Minnesota, New York, and Illinois. Because most programs offer a savings guarantee, residents of these states will begin to notice energy savings from the time they purchase shares in the solar farm. By investing in locally produced renewable energy, local residents can also build resiliency while shielding themselves from the volatile and unpredictable nature of electricity markets dependent on the global trade of fossil fuels.

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