Everybody knows that electricity providers pass various costs on to consumers to make profits. Some of these are estimated over the long-term, such as when building new power plants. Then, power companies, corporations, policymakers, and others use formulas to calculate the LCOE, or the Levelized Cost of Electricity, to benchmark the costs of different methods of production, including natural gas, coal, solar, wind, and battery power.
But even the best calculations can fall short, meaning that the cost of electricity you buy varies greatly. Here are three ways this happens:
1. Global affairs
Perhaps because electricity comes into our homes and is often bought from regional utility companies, many of us think our electricity suppliers are affected only by local or national issues. But this is not the case. In fact, even small, local companies struggle with global events like the lingering impacts of the Covid-19 pandemic, supply chain issues, the war in Ukraine, sanctions, and the decisions of fuel-producing organizations like OPEC.
2. Electricity providers make deals to sell power using LCOE, PPA, and other calculations
Energy suppliers often work in competitive environments, meaning that they must fight for the right to sell electricity to corporations, regions of people, and other cohorts. Large volume buyers use the LCOE calculation, along with Power Purchase Agreements (or PPAs), among others, to work out if deals make sense for both parties. The calculations used can help offer certainty and the opportunity to plan for the long-term, something which is especially important for energy producers who must invest heavily in initial costs.
3. Technology evolves rapidly
Solar, hydrogen, wind, and other technologies have all come on rapidly in the past few years. These leave traditional methods of producing energy, such as coal, oil, and gas power plants in their wake. (Since 2018, the cheapest way to produce energy has been onshore wind and solar power.)
This matters because electricity producers plan for the long term, at least 20-35 years out. But the rapid development of new technology means that some electricity providers are stuck using less efficient, older technology. And the move toward renewables, which was heavily subsidized in the past, is less so now. This is because renewables have achieved grid parity, where they compete favorably with other forms of electricity generation. As a result, some energy companies pass the operational and maintenance costs on to consumers and businesses without the buffer of state subsidies.
Why these things matter
Inflation has been an ever-present story in this years news cycles. And with good reason. CNBC reported that it went up 9.1% in June compared to a year ago. And, worryingly, the Bureau of Labour Statistics noted that gains were across many categories, which suggests it may increase even further. One of the key drivers of inflation has been fuel and electricity costs. Electricity costs have out-paced inflation broadly, rising 13.7% in the year to June 2022. Energy providers have several issues to deal with. Unfortunately, consumers and businesses are often left counting the cost.
