Electricity Pricing Offers: Cost Components

Electricity Pricing Offers: Cost Components

The price or "offer" is quoted in cents per kilowatt-hour (kWh) or dollars per megawatt-hour (MWh). In order to make an accurate comparison between the offers you receive, you need to know for sure what is included in the price, either by reading through the pricing offer or by asking the supplier to clarify. The following items are the common components that comprise an electricity rate.

Energy: The cost of the commodity itself. This is usually calculated by a supplier as the cost to purchase the amount of power you need in the wholesale market for the specific length of time (term or delivery period) you are seeking.

Capacity: A requirement of the electric system operators in several electricity markets. These charges help guarantee that there will be sufficient generation to meet the maximum energy requirements of the market at all times.

Ancillary Services: Charges for the services required to support and maintain reliable operation of the electric grid.

Losses: Charges covering the electricity losses that occur between the point of generation and delivery to your business.

Transmission: The charges associated with the cost of moving power from the generator to your local distribution company. It can be billed by either your supplier or your local utility, depending on your state and the type of product.

Renewable Portfolio Standards (RPS): If your state mandates participation in a renewable energy program, your supplier is required to procure a portion of your power from renewable sources.

Energy Pricing

The energy component usually accounts for approximately half of your electricity price. In energy markets with capacity charges, capacity accounts for about a quarter of the price, with Ancillary Services, Losses, Transmission and RPS making up the final quarter.4