There are many factors that can influence the cost of electricity. Here is a list of the major ones.
The cost of the fuel used to generate electricity can greatly impact electricity rates. For example, if a power plant uses coal as its primary fuel source and the cost of coal increases, the cost of generating electricity at that plant will also increase, which may result in higher electricity rates for consumers. In Texas, natural gas is the largest source of fuel and therefore has a large impact on Texas electricity rates.
Transmission and distribution costs:
Transmission and distribution costs for electricity in Texas are passed on to consumers through a combination of fixed and variable charges on their monthly utility bills. These costs are often included in a separate line item on the bill and are regulated by the Public Utility Commission of Texas (PUCT). The PUCT approves the rates that utilities can charge for transmission and distribution services, and also reviews and approves any proposed rate changes.
The companies responsible for transmission and distribution of electricity in Texas are not the same as the retail electricity providers. The transmission and distribution companies are regional monopolies such as Oncor and Centerpoint. Their services and related costs are the same regardless of the retail electricity provider who sells electricity to the home.
Government regulations, fees, and taxes:
Government regulations and taxes can also affect electricity rates. For example, if a government imposes a carbon tax on the use of fossil fuels, the cost of generating electricity from those fuels will increase, which may result in higher electricity rates. In Texas you may see tax from the PUC as well as state on local taxes on electricity.
Extreme weather conditions, such as heat waves or cold snaps, can increase the demand for electricity as people use more energy to cool or heat their homes. This increased demand can lead to higher electricity rates.
In worse case scenarios, extreme weather can increase the demand for electricity while at the same time causing supply to go off line. This could happen in the case of a severe winter storm that causes damages to the electric grid just when power is needed at the most. In a competitive market such as Texas this will cause real time electricity rates to spike significantly.
The overall economic conditions can also affect electricity rates. During a recession, for example, demand for electricity may decrease, leading to lower electricity rates. Inflation also has a significant impact on the price of electricity. It can drive up the cost of the fuel sources as well as many of the other inputs required to produce electricity.
Energy conservation programs:
Government or utility-led energy conservation programs can help reduce demand for electricity, which can lead to lower electricity rates.
The availability of power plants and the capacity to generate electricity can also affect electricity rates. If there is a shortage of generation capacity, it can lead to higher electricity rates as the utility may have to purchase more expensive electricity on the open market. Maintaining an electricity grid is often a balance between maintaining capacity to meet peak demands while not overspending for capacity that will go unused.
The level of competition in the electricity market can also affect electricity rates. In markets with more competition, consumers may have more choices and potentially lower electricity rates. This is mostly true in deregulated electricity market such as Texas where companies compete to produce electricity and sell it to the gride.
The age and condition of power plants and transmission lines can also affect electricity rates. If a power plant is old and in need of costly repairs or upgrades, it may increase the cost of generating electricity and lead to higher rates for consumers.
Competition Among Retail Electricity Providers:
Competition among producers of electricity can drive down electricity rates. But it is also true that competition among companies who sell electricity to the end user also has an impact on electricity rates. In deregulated markets such as Texas, having multiple companies compete to sell electricity to homes and businesses can drive down electricity rates to the final rate payers.