Cost and Price of Electricity

Alfred Kahn once said that “charging a flat rate for electricity is like charging a flat price per pound for all items in a grocery store. What would happen if everything that came out of the cow — steak, hamburger, suet, bones, and hide — were priced at the average cost per pound?”

The cost of electricity varies from hour to hour and from day to day by more than ten-to-one. Because electricity cannot be stored in significant quantities, it must be generated somewhere at the same time it’s being used, and the wires between those two places must have enough capacity to carry it.  At night, in mild weather, only the lowest-cost “baseload” power plants are running, mostly large coal and nuclear plants that cannot easily be “ramped” up and down quickly to meet changing demand. If the wind is blowing at night, the “spot” price on the wholesale markets can go negative – you can be paid to take it. On the other hand, in hot summer weather when all our air conditioners are cranked up, the spot price can exceed $200/MWh, or $.20/kWh. In the Mid-Atlantic area last summer it went over $1000/MWh a couple of times.

Energy and power

The cost of electric energy, measured in kilowatt-hours, is primarily driven by the cost of fuel, and the efficiency of converting fuel to electric energy. I don’t know exactly what our cooperative pays, but it probably averages around 3-4 cents/kWh, more in summer and less in winter.

We also pay for electric power, measured in kilowatts. This cost pays for “peak demand” — the ability to deliver energy as fast as we want to use it. The sizes of power plants, wires, transformers, switches, and everything else in the network must be large enough to keep delivering power when we all turn on our air conditioners and microwaves. Again, I don’t know exactly what our cooperative pays for peak demand, but it’s probably in the same range as energy costs, when averaged across all the kWh we use.  Large commercial users often pay separately for energy and peak demand, but it’s all bundled together for residential users.

In the near future, the low cost/mile of electric cars is likely to induce many cooperative members to buy them. Our peak-demand charges could skyrocket if everyone plugs them in when they get home in the evening, and then goes in and turns on electric stoves. We will need to work through our policy options before this happens.

Fixed costs

Finally, if you look at your bill, you will see “base charges” or “meter charges”. This supposedly pays for your share of the infrastructure needed to get power to your site – the wires, transformers, and meters, along with personnel and equipment costs needed to keep the system running reliably. If you are a cooperative member, you probably pay 2-5 times more in fixed costs than a customer in Minneapolis or even Hudson. That’s because the customer density in a rural cooperative is much lower than in a city, and so the per-customer infrastructure and maintenance costs are higher.

It is common for utilities to fold at least part of their fixed costs into energy charges, although it’s not exactly clear why, and I understand that something like 10% of the fixed costs for St. Croix Electric are folded into the per-kWh rate. This overcharges larger users and undercharges smaller users by some amount. Is this really desirable in a cooperative?

Paying for electricity

Why do we pay a fixed price for a commodity whose cost varies so widely? One reason is that our cooperative (and most other retail suppliers) cannot measure how much we are using from hour to hour. In much of the U.S. and across the world, meters are still being read at most monthly. When we first moved into our house back in 1976, we were expected to read our own meters. St. Croix electric currently reads meters electronically, but it’s less than once/day. It will cost something to increase that to once/hour, and of course we should not spend the money unless the benefit will outweigh the cost. One potential benefit is that the information from reading the meters includes more than just how much is being used – it also includes whether the power is out, along with quality factors that can help maintenance crews fix problems before they turn into outages.

Another advantage of frequent meter reading is that energy prices can more accurately reflect costs. If you and I and all our neighbors were to change our energy-use behavior as a result, we would all save money because the average cost would go down. That’s because our usage would go down when the cost is high, and would go up when the cost is lower. I suspect at this point you are probably thinking “what a hassle that would be!” For most of us, the difference in our monthly bills would not be enough to bother with – we have more important things to occupy our minds, like who is going to win the next big game. However, appliance manufacturers are starting to introduce models that can receive price signals and turn on when the price drops below some threshold you can set. The additional cost of the appliance is offset by the savings over its life. Some electric car chargers can also do this.

A simpler version of this approach is already available: off-peak service. This gives you a lower rate for devices like air conditioners, heat pumps, or electric water heaters, in exchange for allowing the co-op to remotely shut them off during demand peaks. It’s automatic, usually it’s not noticeable, and it saves money for both the individual customer and the co-op as a whole.