There is really no mystery to energy pricing. After all, energy is a retail commodity. But it still has a certain mystique for many because it is not visible like groceries or clothes.

In reality, the principles are not too different. The factors that affect energy prices add up to the costs of finding, obtaining, refining, or manufacturing the energy, as well as the cost of distribution. In some cases, “energy” refers to the fuel itself (like heating oil or natural gas) and in other cases, it is a manufactured product (like electricity).

How Are Natural Gas and Electricity Prices Determined?

Like every other retail commodity, energy prices are subject to the economic forces of supply and demand. Prices will vary depending on fluctuations in the costs of bringing the energy to market, in whatever form the energy eventually appears. As is the case with food production, there is a natural variation in the costs of obtaining energy. Rain and snow can increase the efficiency of hydro-electric power plants or create chaos in an oil field. Temperature can also increase or reduce the demand for energy.

In different states, different patterns of regulation and deregulation can affect prices by Public Service Commissions. The price of the energy commodity itself will be determined by the original generator or pipeline distributor, but the cost of delivery (i.e. transmission to the customer) may be regulated or allowed to float competitively.

Although the costs to supply electricity actually vary minute-by-minute, most customers pay a stabilized price based on the seasonal cost of generating and distributing the power. Changes are usually dictated by demand for electricity, the availability of different generation sources, and fuel costs (the cost of raw materials to produce the product). Typically, costs—and therefore prices—are highest in the summer when the total demand for electricity is high and its manufacturers of the electricity have to turn to more costly power generation alternatives to meet the demand.

How Are Natural Gas and Electricity Prices Determined?

It costs more to distribute electricity to residential and commercial consumers than industrial consumers. Industrial consumers receive electricity at higher voltages and it is less expensive per customer to distribute high-voltage electricity than lower residential voltages.

According to the U.S. Energy Administration, average 2014 electricity prices were:

  • Residential: 12.5 cents per KWH (kilowatt-hour)
  • Commercial: 10.75 cents per KWH
  • Transportation: 10.27 cents per KWH
  • Industrial: 7.01 cents per KWH

Costs of electricity also vary by region because of the local availability of power plants and fuels, local fuel costs, and pricing regulations. In 2014, electricity ranged from 37.34 cents per KWH in Hawaii to 8.71 cents per KWH in Washington.

How Are Natural Gas and Electricity Prices Determined?

The cost of your electricity is even dependent of your personal use of the energy resource. Early in 2016, the US Supreme Court ruled in favor of a Federal rule to compensate energy consumers who conserve energy during peak periods. They ruled in favor of what the Federal Energy Regulatory Commission (FERC) called a “demand-response” program. Wholesale market electricity operators pay customers in the retail market to reduce their use of electricity when the demand is highest. The court ruled that FERC has the power to set up these demand-response programs across the country as a valuable resource to prevent frequent energy blackouts.

In the US, gasoline business has a going structure of prices. The price relates partly to the cost of refining and handling. The pricing of oil products is complex, just like the pricing of other commodities. A part of the ultimate price of oil products is complicated by the international system, since a portion of our oil is imported.

Of course, you may not think about these fine details in your normal day-to-day, but it’s important to understand what factors can ultimately impact how much money leaves your pocket for energy expenses. When you know how your costs are determined, you can make smarter decisions regarding your commercial energy plan to save yourself money down the line.