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How is your electricity rate determined?

By Tiffany Reynolds

There are a variety of factors involved when calculating electricity plan rates. The laws of supply and demand have especially significant influence over the competitive, deregulated electricity markets. Different regions and markets have varying components that electricity retailers use to calculate their supply rates.

Power Wizard, an energy empowerment company, can help simplify these pricing drivers to help you better understand Texas electricity rates. There are also many tools and services to help you strategize your energy procurement plan.

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Here is an overview of the factors influencing your electricity rate and how to save on energy costs.

4 variables that affect your electricity rate and overall electric bill

Electricity rates often reflect the cost of building, maintaining, and operating the electric grid and power plants. Below are the four key variables that determine the cost of electricity.

The electricity market in Texas

Electricity prices often vary with your locality due to the availability of fuels and power plants, pricing regulations, local fuel costs, and structures. Areas that use their locally available resources to generate electricity have less expensive electricity rates. Conventionally, energy companies rely on hydroelectric power, steam, or coal to produce electricity.

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As of 2019, natural gas-driven power plants generated almost half of Texans’ electricity. The state combines wind power and coal-driven plants to contribute more than 40% of its electricity output. Texas also has two nuclear power plants — Comanche Peak and South Texas Project — that supply about 11% of the state’s power. The Texas fuel mix is constantly evolving to accommodate increasing energy demand that is in part driven by upcoming industrial facilities.

The Texas legislature passed a regulation in 1999 on the deregulation of electricity. The law gives you, the electricity consumer, the power to choose your electric service provider, also called a retail electric provider (REP). The rule applies to most parts of Texas. However, people living in places depending on cooperatives or municipalities do not have this freedom.

Regardless of your REP, the same wire company or transmission and distribution utility (TDU) handles the delivery of energy to your home or business.

Retail electricity providers

The freedom to choose came from the deregulation of energy. This law has had a significant impact on Texas electricity rates. The legislation led to numerous investor-owned utilities or REPs offering competitive electricity plans. REPs buy electricity in bulk from the power generators and then sell it to consumers.

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REPs are for profit businesses and must meet profit margins to cover charges like advertising costs. No-name REPs end up being cheaper because they have lower overhead costs. With over 100 REPs in Texas, finding the perfect provider for your needs can be tricky.  You can save on your electricity bill by picking and switching between different REPs using Power Wizard’s hassle-free DIY shopping tool.

Your energy plan and renewable energy

A fixed rate product has a set price that does not change regardless of natural events, weather, or market volatility. There are certain circumstances where your rate can change as required by a change in law. The contract may be applicable for any term length greater than 3 months.

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There are also variable price products that change every month depending on market factors. These plans are prone to volatility and unexpected extra costs. You can find a favorable rate per kWh plan by choosing a retailer working with utilities to explore renewable energy sources.

Advancing technology and sourcing methods to lower generation expenses are crucial in reducing electricity costs. Tax credits are also driving new wind and solar development in various U.S states. Texas has seen a quadrupled rise in the use of wind power as a source of renewable energy. Transmission lines bring this clean energy from remote wind farms to urban centers.

Who your transmission and distribution utility is

Texas consumes and produces more electricity than any other state in the U.S. and has a stand-alone electricity grid. The Electric Reliability Council of Texas (ERCOT) manages the grid and covers 213 of the 254 counties in Texas.

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ERCOT provides electricity to 26 million consumers by connecting 46,500 miles of transmission lines and 650 electric power plants. This cooperation ensures power reliability and open access to power lines and facilitates a competitive power market.

The Texas legislature and Public Utility Commission of Texas (PUCT) oversee the organization’s operations. The PUCT also regulates Texas electricity rates and ensures compliance with state legislation.

Other key stakeholders in ERCOT include:

  • Electricity consumers
  • Power generators
  • Retail electric providers
  • Transmission and distribution providers
  • Cooperatives
  • Municipal electric providers
  • Power marketers

Your TDU oversees maintaining and operating the physical infrastructure that delivers energy to your home. They take care of the hardware delivering electricity to your home or business by responding to grid interruptions. TDUs, including Centerpoint Energy and Oncor Electric, serve different geographical areas around Texas.

What you need to calculate your current rate

The PUCT developed the strict rule that retail electricity providers must display an electricity facts label (EFL) for every electricity plan offered. The EFL often includes information on the price per kWh for 2,000 kWh, 1,000kWh, and 500 kWh. These three electricity rates indicate the amount you pay when you use the exact amount of power in one month or billing cycle.

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The average Texas residential energy consumer uses 1,132 kWh of power per month. To find out which electricity plans suit your requirements, you must calculate your current rate. Or you can use Power Wizard’s tools that use your actual usage to find the best plan for you.

How you can save on energy costs

Understanding your energy consumption can help lower your electricity costs. You can start by using Energy Star-certified devices that consume less power than non-certified models. You can also use timer plugs or smart plugs to turn off appliances at the outlet for energy-efficient use while on standby mode. Draught-proofing your home can also help to minimize energy consumption by your cooling and heating systems.

These simple yet effective strategies can help you save on energy costs. To help you further cut down on electricity costs, consider using Power Wizard’s tools. Our clients save roughly $748 every year using our services, so sign up today to enjoy the benefits of energy empowerment.

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