Three factors that determine the price of electricityMost of us are well-acquainted with the act of paying our energy bills. But have you ever wondered how the price you pay each month gets set?

As Forbes noted, electricity prices are generally region-specific, and in each region, there are three major factors that can affect the price that consumers pay for power. If you’re wondering whether you can expect prices to rise or fall in your area, look for these contributors to energy price fluctuations to get an idea as to what could happen:

1. The availability of power-generating capacity

Generally speaking, regions that are serviced by more power plants tend to have lower energy prices because the demand for power can be easily met.

This is especially important when demand is high, such as during peak demand hours or periods of extreme weather. A region must have enough power-generating capacity to serve its customers’ needs. According to the EPA, generation costs make up 58 percent of the total market price of electricity.

2. The ability for energy companies to deliver power

Once energy is generated, it needs to be delivered to you, the end user. The EPA reported that this part of the process makes up about 31 percent of energy costs.

Going forward, natural gas pipeline capacity will play a major role in energy distribution. As states shut down more and more coal-fired plants, natural gas will have to fill the vacuum left behind, which will make the pipeline infrastructure a key component of energy distribution.

3. Weather patterns

Weather is arguably the most important determinant of energy prices in a given region. In periods of extreme hot or cold, demand for energy can spike, causing prices to jump with it. Forbes reported that in some cases, extreme weather conditions can push prices up by a factor of 20 times the average rate.

How all three factors can come together

These three factors, along with others, don’t happen in isolation from one another. Shifting conditions surrounding generation, distribution and weather can combine to create wild price swings.

In last year’s polar vortex, the sustained period of extreme cold led to a high demand for energy and heating fuel. This affected distribution because suppliers had a difficult time delivering energy in such high quantities, especially in areas with insufficient pipeline infrastructure. In addition, power plants and peaker plants, which provide additional generation during times of high demand, had to work over time and use more resources than planned. The northeastern U.S., in particular, saw natural gas prices jump because resources were stretched thin as demand went through the roof.

All of these factors came together to produce one of the coldest and most expensive winters on record. By partnering with an ESCO, you can take some of the volatility out of the equation by signing up for a fixed rate energy bills, which will make your expenses more predictable.

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