How a commercial electricity supply price is actually assembled

The components

• Wholesale energy. The commodity cost of the electricity itself, shaped to the hours you actually consume it. This is usually the largest component and the one most people mean when they say "the rate".
• Capacity. The cost of ensuring generation is available to meet peak system demand. In some markets this is a substantial component and it is driven by your own contribution to system peaks rather than by your total consumption.
• Transmission. The cost of moving power across the high-voltage network, distinct from local distribution.
• Ancillary services. Grid reliability services — frequency regulation, reserves and similar — allocated to load.
• Line losses. Electricity lost between generation and your meter. You are billed for what was generated on your behalf, not only what arrived.
• Load shaping and balancing. The cost of matching supply to your particular consumption pattern, and of covering the risk that your consumption differs from forecast.
• Renewable compliance. The cost of meeting any applicable renewable portfolio obligations in your state.
• Credit and risk premium. The supplier's assessment of your credit and of the price risk it is assuming under the contract structure.
• Margin. The supplier's own return.

Why capacity deserves separate attention

Capacity is the component most likely to surprise a commercial buyer, because it is driven by your demand during a small number of system peak hours rather than by your overall consumption.

In practice this means an account can reduce its capacity cost substantially by reducing load during a handful of hours per year, without changing its consumption meaningfully the rest of the time. The mechanism differs by market — PJM sets a capacity tag from prior-summer peak hours, and ERCOT allocates transmission cost through four summer intervals — but the principle is common: a few hours determine a year of charges.

Why load shape moves the price

Two accounts consuming identical annual kilowatt-hours can be priced differently because of when they consume them. An account that draws steadily overnight is buying cheaper hours than one concentrating its draw into summer afternoons.

This is why a supplier asks for interval data or at least twelve months of usage before pricing seriously, and why a quote produced from an annual kilowatt-hour figure alone should be treated as indicative rather than firm.

What this explains about quotes

Three things that otherwise look arbitrary:

• Why quotes differ between suppliers for the same account. Different views on forward prices, different capacity positions, different credit assessments and different margins.
• Why some components are passed through. Components set by an ISO or regulator can move mid-term and are outside the supplier's control.
• Why start date and term change the price. Both change which forward periods the supplier is buying, and a start date a few months apart can price quite differently.

What to do with this

Not to reverse-engineer a supplier's build-up, which is neither possible nor necessary. The practical use is to ask better questions: which components are fixed, which are passed through, what the current level of each pass-through is, and how a different start date or term would change the picture.

A supplier who can answer those clearly is demonstrating something useful about how they will behave for the rest of the contract.

Common questions

What makes up a commercial electricity supply rate?

Wholesale energy, capacity, transmission, ancillary services, line losses, load shaping and balancing, renewable compliance obligations, credit and risk premiums, and the supplier’s margin.

Why do electricity suppliers quote different prices for the same business?

They hold different views on forward prices, different capacity positions, different credit assessments and different margins, and they fix different components rather than passing them through.

Why does my contract start date change the price?

Because it changes which forward periods the supplier is purchasing. A start date a few months earlier or later can price quite differently even for an identical account and term.

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