The Complexity Of Electricity: Local Markets and Unique Pricing Fund The Grid

There is widespread agreement that electricity prices will continue to rise in the coming years. The exact impact of these increases will vary across the country, since electricity prices are ultimately paid at the local level. Factors including a building's location, its usage profile, and tariff structure directly influence pricing.

To understand overall price trends, the average residential prices across major U.S. cities provide directional insights (see chart above). Since residential prices are impacted by fewer variables than those commercial, industrial or transportation sectors.

Over time prices have steadily risen, with accelerated increases this decade driven by inflation, growing demands, and the buildout of AI data centers, following a prior decade of more moderate increases supported by efficiency gains and increases in natural gas supply.

Zooming In: US Grid Regions to States

While U.S. pricing averages provide a general directional view, the U.S. electricity market is a geographically diverse market market with several states that are larger than medium sized countries.

The continental U.S. incudes three major interconnection zones (see chart below). The Western Interconnection, covering states in and west of The Rockies; ERCOT in Texas which operates its own isolated grid; and The Eastern Interconnection, which includes all other states.

The three interconnection zones are comprise of regional transmission organizations (RTOs) and independent system operators (ISOs) which coordinate and monitor grid operations (shown in the map below).

The RTOs/ISOs in the Eastern Zone are interconnected to each other, as are the RTOs/ISOS in the Western Sone. Additionally, they are each connected to Canada, as well.

Zooming In from States to Local Utility Markets And Expenditures

Moving beyond the interconnection zones and RTOs / ISOs, the next layers of the electricity market operate at the state and local utility levels. Because each state has distinct geography, generation resources, and consumption patterns, some are better equipped to generate electricity in-state, while others rely more heavily on imports from neighboring states, as well as Canada.

At the local utility level, there are significant differences in how electricity is sourced, delivered and priced. Across the U.S., more than 3,000 electric utilities operate, including investor-owned, municipal and cooperative utilities. Investor owned utilities supply around 75% of all customers nationwide, while municipal and cooperative utilities serve the remainder.

At the utility level, pricing is ultimately determined by a combination of factors, including each building's unique usage profile, the transmission nodes that electricity passes through, and the tariff class for the property.

Overall, the result is highly complex system, with many variables influencing local electricity prices and expenditures at the property level.

Email stuart@westchestercleanenergy to discuss insights and savings for your properties