Understanding the Energy Market

Ever wonder why your utility bill changes so much? Just who decides how much a kilowatt hour is worth? The energy market can be vast and confusing, but there's a few basic things to know that can help you understand just what makes the energy market so different from any other market.

What is a power market?

The power market in the US is a combination of wholesale and retail markets. A wholesale market is where electricity is sold between utility providers and traders of electricity before being sold to the consumer. A retail market is the sale of electricity to the consumer. Both of these markets can be either a regulated market or a competitive one.

A regulated market means that utilities control the electricity, from generation to transmission and distribution to the consumer. In a competitive market, the market is run by independent system operators, or ISOs. This allows independent producers of power and non-utility generators to trade electricity, but it is unlikely that they will own resources for either generation or transmission. It is a retail market.

In the US we have both regulated markets and deregulated markets, which is why some people can shop around for cheap energy, and some can’t.

One with the Grid

Every source of energy – whether that be from natural gas, oil, coal, wind, or solar – ends back up in the grid.

Unless you live off the grid completely, your house, apartment, or business office is using energy that is sent out along the grid network of poles, wires, cables, and pipes. Meters attached to each unit capture how much energy is being consumed every month. Employees from the utility company read this information and calculate the total kilowatt hours for the billing period.

As the customer, you get charged for those kilowatt hours (denoted as kWh) depending on the current rate. For instance, if the utility or energy provider is charging 20 cents per kilowatt hour and your total kilowatt hours (how many kilowatts you consumed per hour) for the monthly billing period is 900, then your monthly bill will be $180.00 (excluding service and maintenance fees that the utility provider charges).

Unfortunately, it's often not as straightforward as that. Like any market, rates will change, and often multiple times with one billing cycle. This is why your monthly electricity or gas bill is always different each month, even during times of the year where demand is always high. As a whole, the energy market is one of the most volatile ones out there.

How big is the global power market?

Research shows that, in 2018, the global power market generated around $1,341.6 billion, with a growth of 2.4% in four years. This figure is expected to rise 3.5% by 2022 for a total of around $1,537.5 billion!

How many power markets are there?

There are approximately 90 countries and entities that significantly contribute to the global power market.

How big is the US power market?

The US Energy Information Administration states that there are over 7,300 power plants within the US power grid, which work using millions of miles of power lines to supply 145 million consumers across the US. In 2018, the power industry earned a revenue of around 406.5 billion US dollars.

How does the US electricity market work?

In the US, the way in which electricity is traded depends on the region of the country. A lot of cities, such as Austin (TX), Los Angeles (CA), and Nashville (TN), are supplied by utilities that are municipally-owned, and some rural locations are supplied by rural cooperatives that are customer-owned. However, most consumers are supplied electricity by investor owned utilities which can be either regulated or deregulated.

The way they are regulated determines how both retail and wholesale prices are set and how power plants are obtained.

How do power plants sell electricity?

Electricity is sold in both wholesale and retail markets, much like almost any other product. Energy created by power plants is often bought by resellers, i.e. the wholesale market, and then this electricity is sold to consumers, i.e. the retail market.

The way in which electricity is bought varies. Some utility companies will actually own their own power plants and only sell the electricity that is generated within them. Utilities that don’t own their own power plants can buy electricity from other utility companies, independent power producers, power marketers, or from a wholesale market set up by an ISO.

Why Do Prices Fluctuate so Much?

There are a number of things that can affect the kWh rates.

Like with any product, demand and supply is the underlying driver of prices. However, unlike a normal market, the energy market's supply is always transient. Because there isn't a consistently reliable way to store the energy that is being generated, it has to be used right away. It goes directly from the source to the customers and then is gone. Used up. This applies more specifically to electricity supply than things like gas, which can be stored better than electricity can.

Think about other resources like food. When harvest time comes, farms can store the excess grain and produce into silos or cold storage to be used when the supply starts to run low in the late winter. This means that prices will remain relatively stable. Unfortunately, the energy market has no equivalent for silos or cold storage. There are batteries, but they can only store so much, and their capacity to store high volumes of power degrades rapidly after each discharge.

So, when there is a higher demand for a supply that can't be stored, energy has to be generated at a much faster rate to make up the difference. They can't dip back into reserves to help supplement the load. The result? A higher electricity bill in September after a month of putting the AC on full blast because of the long hot days.

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How much of the energy market is powered by clean energy?

In 2019, around 11% of energy consumption in the US was powered by clean energy sources, and about 17% of electricity was generated with renewable energy sources. However, clean energy sources, such as wind power and solar energy, are being utilised more and more to generate electricity, and this percentage is expected to grow exponentially in the coming years and decades.

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Other Factors that Affect Rates

A lack of consistent storage isn’t the only thing that affects market rates.

Some of the others include:

• Where you live There is no federally regulated energy market across all states, which is why rates change depending on where you live. Hawaii, for instance, gets charged roughly 37 cents per kilowatt hour while Washington state enjoys a mere 9 cents per kilowatt hour. Sadly, there isn’t much you can do about that besides picking up and moving from your island paradise to the daily rain of Washington.

• Residential vs Industrial The type of customer using the energy also affects the rates. For instance, industrial customers will be charged less per kilowatt hours than residential customers because they will be using much more energy. It works similar to a buy-in-bulk kind of program.

• Who your utility company is Remember, your total utility bill each period isn’t just charges for the energy that you used. It also includes delivery fees and maintenance fees that the utility company servicing your area charges in order to maintain the infrastructure so that the power can reach your home or business. These fees will vary depending on which utility company, which are also affected by the weather conditions and other factors for your region.

How many power grids are there?

In the US, there are 3 major interconnections of local power grids that power the lower 48 states, the Eastern Interconnect, the Western Interconnect, and ERCOT. These interconnections function independently from one another which means that hardly any power is shared. Here’s how they are divided:

• The Eastern Interconnect covers the Great Plains states, although excluding a large percentage of Texas, over to the Atlantic Coast.
• The Western Interconnect covers west of the Great Plains and Rocky Mountains, over to the Pacific Coast.
• The third interconnect is known as the Electric Reliability Council of Texas (ERCOT) and covers the majority of Texas.

This power grid structure ensures that the grid is reliable as there are many ways in which power can flow and generators are not overstretched, resulting in prevention of power failures.

Who owns the electric grid and energy market?

The electric grid and energy market is owned by a mix of entities who are responsible for processes including generation, transmission, and distribution of electricity.

For instance, there are 192 investor-owned utilities that are responsible for 38% of power generation, 80% of power transmission, and 50% of distribution. Then there are around 2,900 cooperatives and public-owned utilities that are responsible for 15% of power generation, 12% of power transmission, and almost 50% of distribution.

There are also about 2,800 independent producers of power who are responsible for 40% of power generation, and 9 power agencies owned by the Federal Government who are responsible for 7% of power generation and 8% of transmission. Finally, there are 211 Electric Power Marketers that are responsible for around 19% of sales to customers.

The grid itself is run by both operators of generators and transmission owners, but the most critical operators are the ISOs. These independent system operators monitor the systems, transmit and direct the power, and put emergency procedures in place. There are also Reliability Coordinators who ensure that the power systems, and their operators, are up to standard.

What solutions are available to customers?

The good news is that the main problem driving a volatile market can eventually be solved as technology gets better.

Already, grants given to places like MIT are being put to use in order to develop better battery technology¹ that can be used in industrial-sized storage needs. The bad news is, the customer that still needs to use energy and pay a monthly bill probably won’t be seeing the payoffs of those improving technologies for quite some time.

There are a few other ways to help ease the strain of a volatile market on the consumer, however:

• Developing smaller, smarter microgrids The idea here is that the smaller the grid, the easier to manage, and the less it will cost to maintain. Cities like Pittsburgh are trying to think outside the box by planning a series of microgrids² that will incorporate smart transportation links as well, such as electric buses. The goal is to improve traffic and air quality while cutting down on energy costs for city transportation.

• Fixed rate and subscription-based energy plans In deregulated markets, customers can choose their energy supplier. Many of these companies are starting to move into fixed rate plans, meaning that no matter the month or season, your rate per kWh will never change. Additionally, some companies are considering subscription services, which work in a similar way to fixed rate plans. The main difference is the bill each month. That will stay the same on a subscription plan regardless of the time of year or how much energy was used that month.

Though the energy market is a volatile one, steps are being made to ease the strain on people who have no choice but to use energy in their daily lives. Since we’re all connected to one grid, it’s all in our best interests to try to make that part of living a whole lot easier.

What is meant by 'energy market'?

Energy markets are commodity markets that deal solely with the exchange and supply of energy. An energy market can refer to a market for electricity, but it can also apply to natural gas and oil markets³. In each region of the United States, there is a geographic-based energy market. To power communities efficiently, the market operates to generate and distribute energy. Because of their importance and ongoing need for innovation, energy markets are known as fast-growing and intricate sectors⁴.

The energy market is anything but easy to understand with all the complications surrounding the topic. Decades of conflicts over federal vs. state rights, market regulation vs. deregulation, monopolies vs. competition, and other issues are all reflected in its sector⁵.

How much is the energy market worth?

The energy market has reached the hundred-billion mark; specifically, it's estimated to be worth between $600 to $800 billion⁶. Not only is this an enormous number, but it's forecasted to nearly double by 2027, making it a very profitable market. The United States leads the world in both energy production and consumption⁷.

What are the two types of energy markets?

Energy markets are classified as either regulated or deregulated. Traditionally, electricity markets in the United States were regulated, limiting customer choice until the Public Utilities Regulatory Policies Act from the 1970s allowed for energy deregulation, followed by the Energy Policy Act of 1992, creating an open market. The purpose of the Energy Policy Act was to boost the use of clean energy and improve energy efficiency. In addition, it gave utilities more flexibility and established new rate-setting guidelines⁸.

What is a regulated energy market?

All electricity is owned and operated by utilities in the regulated electricity market. The utility has complete control over the entire process, from generating to supplying to metering. Utility corporations own the infrastructure and transmission lines, which are used to supply energy directly to customers. Electricity tariffs are set by state public utility commissions and must be followed accordingly in regulated energy market states. As a result, consumers have fewer choices over their suppliers but benefit from steadier prices.

What is a deregulated energy market?

A deregulated energy market allows suppliers to compete over the buying and selling of electricity. The electricity generated by production facilities is subsequently sold wholesale to retail electricity suppliers. Deregulated energy markets benefit consumers by allowing them to compare rates and choose an energy supplier. Renewable energy is also more accessible in a deregulated market.

While deregulated electricity markets offer a wider selection of renewable energy options, cleaner options are growing in regulated markets. And for now, consumers in regulated states can still benefit from renewable energy's environmental and economic benefits.

Who regulates energy suppliers?

The Federal Energy Regulatory Commission (FERC) is an independent agency that oversees electricity, natural gas, and oil interstate transportation. FERC also evaluates project proposals like interstate natural gas pipelines and hydropower facilities.

FERC regulates many aspects, including transmission and wholesale of electricity, gas, and oil in interstate commerce. They also examine mergers and acquisitions and corporate deals involving electricity companies. Furthermore, they serve to oversee all other transmission methods, safe operation, licenses, markets, enforcement of requirements, and more⁹.

How is electricity regulated?

The Federal Energy Regulatory Commission regulates "wholesale" or "bulk" transactions that take place before state-level retail sales. The Federal Power Act mandates that wholesale prices and transmission charges be cost-based. However, FERC merely accepts prices determined by markets that meet its competition rules. FERC's general strategy, regardless of whatever political party controls the government, has been to increase the role of markets while reducing direct regulation within legal bounds¹⁰.

FERC regulates prices by issuing orders and addressing policy issues that may require changes to existing rules and routines. They have the authority to make orders on its initiative or in response to complaints lodged with the agency. All FERC judgments must result in wholesale rates that are "just and reasonable," according to the Federal Power Act¹¹.

Is renewable energy regulated?

Renewable energy is regulated at both a federal and state level. However, there are no current federal statutes concerning renewable energy. In addition, there are various definitions of what is considered renewable at a state level, and therefore, different rules apply. Check your local government to learn any policies that may apply to your home and renewable energy. In recent years, FERC has begun the process of expanding market opportunities for renewable energy generation.

With Order No. 872, the Federal Energy Regulatory Commission amended these restrictions to give renewable energy companies broader access to the grid. Consumers, the environment, and taxpayers all stand to gain from this. Some states stepped in to mandate pricing methods that favored renewable energy by spreading the overall cost of electricity across the entire consumer base. However, utility corporations' adamant opposition to renewable energy development has stifled expansion in some markets and governments¹².

How big is renewable energy?

Between 2010 and 2020, renewable energy usage increased by over 40%. A major increase in wind energy storage capacity has led to such expansion, with a portion of that percentage coming from the growth of solar power installation. The demand for renewable energy increases as people become aware of their options and their affordability. Consequently, consumption of fuels is decreasing as we increase capacity for renewable energy storage and other sustainable options¹³.

Over the next few years, the world's capacity to generate electricity from solar panels, wind turbines, and other renewable technologies is expected to increase. As a result, global renewable electricity capacity is estimated to increase by more than 60% from 2020 levels to over 4,800 gigawatts by 2026, equaling the total global power capacity of fossil fuels and nuclear combined. Renewables are expected to account for about 95% of the increase in worldwide power capacity by 2026, with solar accounting for more than half of it.

Between 2021 and 2026, the amount of renewable capacity added is predicted to be 50% more than between 2015 and 2020. Stronger government regulations and more ambitious renewable energy goals established before and during the COP26 Climate Change Conference drive this trend. China currently leads the race with massive quantities of renewable energy at its disposal¹⁴.

Governments can speed up the adoption of renewable energy by tackling significant roadblocks such as permits and grid integration concerns, social acceptance issues, inconsistent regulatory approaches, and insufficient remuneration. In developing countries, high financial costs are also a key impediment. Nevertheless, we will see renewable energy leading the way to a better, healthier world.

If you think you’re ready to make the switch to renewable energy, Inspire Clean Energy makes it easy to go green. By simply signing up, your home’s electricity supply will be from renewable resources, like wind and solar, but without the hassle of installing complicated or expensive hardware such as solar panels on your home.

To get started, visit our homepage and enter your address and/or ZIP Code. If Inspire’s clean energy supply plans are available in your area, you can proceed with linking your utility and discover the beginning of consistent and predictable monthly energy bills.

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1. news.mit.edu/2017/toward-solid-lithium-batteries-0202↩
2. microgridknowledge.com/grid-of-microgrids-pittsburgh↩
3. energywatch-inc.com/what-are-energy-markets↩
4. ferc.gov/electric-power-markets↩
5. sciencedirect.com/topics/engineering/energy-market↩
6. statista.com/statistics/1094309/renewable-energy-market-size-global↩
7. alliedmarketresearch.com/renewable-energy-market↩
8. energywatch-inc.com/regulated-vs-deregulated-electricity-markets↩
9. ferc.gov/about/what-ferc/what-ferc-does↩
10. rff.org/publications/explainers/ferc-101-electricity-regulation-and-the-federal-energy-regulatory-commission↩
11. sparkenergy.com/energy-regulation-by-state↩
12. forbes.com/sites/edhirs/2020/08/04/what-will-the-latest-purpa-regulatory-update-mean-for-renewables/?sh=2eed45f85016↩
13. npr.org/2021/05/11/995849954/renewable-energy-capacity-jumped-45-worldwide-in-2020-iea-sees-new-normal↩
14. iea.org/news/renewable-electricity-growth-is-accelerating-faster-than-ever-worldwide-supporting-the-emergence-of-the-new-global-energy-economy↩