Beatrice Lang
The price of electricity is a complex issue that varies across the world. Electricity is typically first produced and sold on the wholesale market before being distributed to consumers on the retail market. Wholesale electricity costs are influenced by the real-time cost of supplying electricity, with prices reflecting the operating and fuel costs of the most expensive unit needed to meet demand. Retail electricity prices are then influenced by the wholesale market costs, with utilities charging consumers for the power supply through monthly bills. In this discussion, we will explore the factors that affect wholesale and retail electricity prices and how they impact consumers.
| Characteristics | Values |
|---|---|
| How electricity is bought and sold | It varies by region. Many cities are served by municipally-owned utilities, some rural areas are served by customer-owned rural cooperatives, and most electricity customers are served by investor-owned utilities. |
| Retail electricity | Not necessarily purchased from wholesale markets. Retail electricity can come from over-the-counter (OTC) transactions and power exchange (PX) transactions. |
| Wholesale electricity | Bought and sold through contracts and markets. Contracts are between individual buyers and sellers. Markets establish prices for electricity products and services through competitive bids. |
| Retail electricity prices | Usually highest for residential and commercial consumers because it costs more to distribute electricity to them. |
| Wholesale electricity prices | Fluctuate throughout the day, seasons, and locations due to factors such as fuel prices, consumer demand, and transmission constraints. |
| Retail restructuring | In states that undertook retail restructuring, IOUs are required to sell off their power plants to avoid a competitive advantage. |
| Retail rates | Set at a level to recover the utilities' costs, including the cost to purchase or generate electricity, the cost of delivery, and administrative costs. |
| Wholesale markets | Centrally administered by regional transmission organizations (RTOs) or independent system operators in regions covering about two-thirds of US households. |
| RTO markets | Prices need not be equal to the sellers' costs. Sellers may offer to sell energy at a price above their actual costs and the prices are established by the highest bid. |
| Retail rates and wholesale markets | Retail rates are influenced by wholesale markets, especially in areas where utilities purchase more power from the wholesale market. |
| Retail electricity bill | The bill covers the IOU's costs for distribution, metering, and billing, plus the generation charge paid to the alternative supplier. |
| Wholesale prices in 2025 | Expected to average slightly higher in most US regions than in 2024, except in Texas and the Northwest. |
| Retail electricity prices in 2025 | Expected to be 2% higher than in 2024 for U.S. residential customers, averaging 16.8 cents per kilowatthour. |
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What You'll Learn
- Wholesale electricity prices fluctuate daily and seasonally
- Retail electricity prices are reviewed and approved by utility regulators
- Retail electricity prices are highest for residential and commercial consumers
- Wholesale electricity prices are determined by the cost of supplying electricity
- Retail electricity prices are influenced by wholesale costs
Wholesale electricity prices fluctuate daily and seasonally
Wholesale electricity prices are subject to daily and seasonal fluctuations due to various factors, including fuel costs, consumer demand, transmission constraints, and weather conditions.
The price of wholesale electricity is influenced by the cost of fuels used in power generation, such as natural gas or oil. Fluctuations in fuel prices can significantly impact the operating costs of power plants, leading to variations in wholesale electricity rates. For example, in February 2025, wholesale natural gas prices in New England ranged from $4/MMBtu to over $20/MMBtu, contributing to spikes in wholesale electricity prices in the region.
Consumer demand also plays a crucial role in determining wholesale electricity prices. Higher demand during peak hours or seasons can drive up prices as power plants incur higher generation and delivery costs. Extreme temperatures, such as cold snaps or heatwaves, can lead to a surge in electricity demand as people use more energy-intensive appliances, resulting in price increases. For instance, Texas experienced a significant rise in wholesale electricity prices during the summer of 2023, with rates soaring from the annual average of $101 per megawatt-hour (MWh) to $5,000 per MWh.
Transmission constraints can also impact wholesale electricity prices. Limitations in the flow of electricity due to infrastructure issues or congestion in the power grid can prevent the least-cost electricity from reaching certain locations, affecting the overall wholesale price. Additionally, wholesale prices can be influenced by global events and supply chain issues. For example, Russia's invasion of Ukraine in 2022 caused wholesale energy prices in Europe to surge by 237% due to concerns over natural gas supplies.
Seasonal variations in wholesale electricity prices are common, with higher prices typically observed during seasons with extreme temperatures. However, other factors, such as fuel supply constraints or unexpected weather events, can also contribute to price fluctuations. For instance, the Northwest region of the United States experienced a wide range of wholesale electricity prices in February 2025 due to cold temperatures, with rates varying from $24/MWh to $254/MWh.
In summary, wholesale electricity prices are dynamic and responsive to market conditions, fuel costs, consumer behaviour, and unpredictable events. These factors collectively contribute to the daily and seasonal fluctuations observed in wholesale electricity rates.
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Retail electricity prices are reviewed and approved by utility regulators
The retail price of electricity is the cost that consumers pay to their utility or independent supplier for electricity to power their homes or businesses. Retail electricity prices are reviewed and approved by utility regulators, and these prices are set to recover the utilities' costs, including the cost to purchase or generate the electricity, the cost of delivering the power, and administrative costs.
In the United States, the method by which electricity is bought and sold varies by region. Many cities are served by municipally-owned utilities, some rural areas are served by customer-owned rural cooperatives, and most electricity customers are served by utilities owned by investors. These investor-owned electric utilities can be either regulated and operate as vertically integrated monopolies with oversight from public utility commissions or operate in deregulated markets where electric energy prices are set by the market with some federal oversight of wholesale market operations.
In regulated states, retail rates are based on a regulated rate of return on investments. In contrast, deregulated retail utilities purchase electricity at market-determined wholesale prices and then sell it to customers at market-determined retail prices, given competition from other retailers. Deregulated states use markets to determine which power plants are necessary for electricity generation, and utilities in these states must acquire power from independent energy suppliers for their customers.
Wholesale electricity costs are paid for by market participants that purchase electricity from the wholesale market for their own use or because they are suppliers to retail consumers. The price of wholesale electricity fluctuates throughout the day and year and at different locations due to factors such as fluctuations in fuel prices, consumer demand, and transmission constraints. These wholesale costs are reflected in the retail rates, and the relationship between wholesale market costs and retail rates varies according to state retail procurement policies. For example, in areas where utilities purchase more power from the wholesale market, retail customers end up paying rates that are more dependent on wholesale costs.
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Retail electricity prices are highest for residential and commercial consumers
Electricity is a commodity that is produced and sold on the wholesale market before being distributed to consumers on the retail market. Wholesale electricity costs are paid for by market participants who purchase electricity from the wholesale market for their own use or to supply to retail consumers. The price of wholesale electricity fluctuates throughout the day and across seasons and locations due to various factors, such as fuel prices, consumer demand, and transmission constraints. These wholesale costs then influence the retail rates that consumers pay for their electricity.
Retail electricity prices are usually highest for residential and commercial consumers. In May 2025, the average electricity rate across the United States ranged from 7.18 cents per kilowatt-hour (kWh) in North Dakota to 42.34 cents per kWh in Hawaii for residential customers. Commercial rates followed a similar pattern, with North Dakota having the lowest rate of 7.18 cents per kWh and Hawaii charging the highest rate of 38.29 cents per kWh.
The high retail electricity prices for residential and commercial consumers are attributed to the higher cost of distributing electricity to them. Industrial consumers, on the other hand, can receive electricity at higher voltages, making the supply more efficient and less expensive. As a result, the retail price of electricity for industrial customers is typically closer to the wholesale price.
It is worth noting that electricity rates can vary significantly across different locations due to factors such as the availability of power plants and fuels, local fuel costs, and pricing regulations. For example, Hawaii's high electricity rates are partly due to its reliance on imported petroleum fuels for electricity generation. Additionally, retail electricity prices are reviewed and approved by utility regulators, and changes in wholesale costs may take time to be reflected in retail rates.
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Wholesale electricity prices are determined by the cost of supplying electricity
Wholesale electricity prices are determined by a multitude of factors, all of which contribute to the cost of supplying electricity. The wholesale price of electricity reflects the real-time cost of supplying electricity, which varies from minute to minute. The cost of supplying electricity is influenced by factors such as fuel prices, power plant costs, transmission and distribution system costs, and demand for electricity.
Fuel prices, particularly for natural gas and petroleum fuels, can increase during periods of high electricity demand or when supply constraints occur due to extreme weather events or accidental damage to infrastructure. Power plants have financing, construction, maintenance, and operating costs that contribute to the overall cost of supplying electricity. The transmission and distribution systems that connect power plants with consumers also incur construction, operation, and maintenance costs, including repairs and cybersecurity improvements.
Demand for electricity is typically highest during the afternoon and early evening, resulting in higher costs to provide electricity during these peak hours. The wholesale price of electricity reflects the cost of generating electricity and delivering it over the high-voltage transmission system, taking into account system conditions and transmission constraints. The largest portion of the wholesale cost is the energy price, with other products and services contributing to the overall market-based cost of wholesale electricity.
In the United States, wholesale electricity markets in regions covering about two-thirds of households are centrally administered by regional transmission organizations (RTOs) or independent system operators. Prices in RTO markets are determined by the highest bid, and sellers may offer to sell energy at a price above their actual costs. This dynamic can result in wholesale costs being greater in RTO regions, which is reflected in higher retail rates, particularly in areas where utilities purchase more power from the wholesale market.
Overall, the cost of supplying electricity is a complex and dynamic equation that takes into account various factors, and wholesale electricity prices are a reflection of these underlying costs. These wholesale prices then influence the retail rates that consumers pay for their electricity usage.
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Retail electricity prices are influenced by wholesale costs
In regions covering about two-thirds of US households, wholesale electricity markets are administered by regional transmission organizations (RTOs) or independent system operators. RTO markets allow sellers to offer energy at a price above their actual costs, with the final price established by the highest bid. This means that wholesale costs can be greater in RTO regions, leading to higher retail rates, especially in areas where utilities purchase more power from the wholesale market.
Retail electricity prices are set to recover the utilities' costs, including the cost of purchasing or generating electricity, delivering power, and administrative expenses. In restructured utility arrangements, customers pay for electricity from an alternative retail supplier, covering the distribution, metering, and billing costs, as well as the generation charge paid to the alternative supplier. Retail rates can also be influenced by the state's regulatory constructs, with regulated utilities basing rates on a regulated rate of return on investments, while deregulated utilities purchase and sell electricity at market-determined prices.
The relationship between wholesale and retail electricity prices can vary over time and across regions. For example, between 2008 and 2012, wholesale electricity prices decreased in all US markets, while retail prices remained stable. In 2022, the US annual average retail price of electricity was about 12.49 cents per kilowatt-hour, with prices varying by locality based on the availability of power plants, fuel costs, and pricing regulations. Retail electricity prices are also influenced by demand, with prices typically highest for residential and commercial consumers due to the higher cost of distributing electricity to them.
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Frequently asked questions
Wholesale electricity is bought and sold between individual buyers and sellers or through markets. Retail electricity is then sold and distributed to consumers.
The price of wholesale electricity changes throughout the day, seasons, and locations. The price reflects the real-time cost of supplying electricity.
Retail electricity prices are influenced by wholesale costs, especially in areas where utilities purchase more power from the wholesale market. Retail electricity prices are usually highest for residential and commercial consumers.
Some factors include fuel prices, power plant costs, transmission and distribution system costs, and weather conditions. Fuel prices, especially for natural gas, can increase during periods of high electricity demand.
As a consumer, you pay a regular bill for electricity. The cost on your bill depends on variables such as location, supplier, and time of year. You may be able to choose your electricity supplier, depending on your region.
