Why Do Energy Companies Charge Different Rates?

Why Energy Companies Charge Differently

There are many reasons why energy companies charge different rates from one another, and from one location to another or from one segment of consumers to another.

Some of these reasons are related to the companies themselves, and some are out of their control.

I’m an electrical engineer with more than a decade of experience working with different energy companies, and I wrote this article to help you know about the main ten reasons why energy companies have different tariffs, and what you can do in order to keep your bill as low as possible regardless of the company rates.

And in the conclusion at the end of this article, you will how you can eliminate your bill almost entirely, and without paying a dime in advance.

Without further ado, let’s jump!

10 Reasons Energy Companies Charge Different Rates

Different Technology

There are many technologies that are used to generate electricity in power plants, and each technology requires using a certain fuel, a certain capital to build the plant, doing a certain type of maintenance on regular basis, having a minimum number of qualified personnel to operate the plant, and so on.

Tech Causes Different Energy Rates

This all makes it almost impossible to sell electricity by all companies at the same price because the cost of generating one unit of kWh electricity is different from one company to another.

Grid Components & Maintenance

In addition to the generation power plant mentioned above, there are other components of the electrical system that are necessary to transmit electricity from power plants to consumers.

These include high voltage transmission lines and their big towers, transformers and their protective devices like circuit breakers and isolators, low voltage cables, utility meters, …etc.

And these also could differ from one company or area to another in terms of technology, sizing, material, manufacturer, age, …etc.

And these systems also require regular maintenance activities and a qualified staff to operate and maintain them 24/7, and the number of personnel might also differ from one company in one place to another company serving the same or a different location.

This means that energy companies will eventually charge different rates because thy have different costs associated with transmitting and selling energy to consumers like you and me.

Cost of Land

Energy companies need to either buy or rent a land in order to build their plants, offices, substations, …etc.

And the cost of land is never the same from one place to another even in the same town.

For example, in New Jersey, an acre might cost around $196,410 to purchase, which is around a hundred times the cost of an acre in New Mexico (around$1,931).

This will definitely have its effect in charging different rates of electricity from one company to another and from one location to another.

Different Salaries

Most of the utility companies are private companies, and each one offers a different salary or compensation package to its employees.

Different from the previous reason related to land cost, these are running costs that might increase over time because of inflation and some other factors, which means that this factor has a significant effect on the different tariff rates of electricity that energy companies charge.

Fuel Types and Prices

One of the main factors why energy companies have different tariffs is that the fuel price is different from one location to another, or from broker to another.

Even in the same area, different companies might be able to get fuel at lower prices from their competitors, which reduces their costs, and that would finally make them able to make the same profit margin while selling at a lower price than other companies.

This is assuming that all companies use the same technology and the same type of fuel to generate electricity, and they all have the same size of the grid, number of employees, and pay the same salaries.

Add to that the fact that different power generation plants use different technologies and different fuels, and some of them use renewable resources to generate part of their electricity, and some might use only renewable energy, which is basically a free fuel.

Fuel Causes Different Energy Prices

Demand Fluctuations

This is another major factor in price differences between energy companies, which is also one of the main reasons of fluctuations in electric bill between different months even for the same consumer.

Some areas that have a very hot summer, and/or a very cold winter, would have a different demand range between these months and the months of spring or autumn, or between the day and afternoon hours at one side, and late night and early morning hours on the other side.

If the utility company in this situation was to reliably supply all the necessary demands at the time the consumers request them, this means that the company would need to build big generation plants and transmission lines in order to meet the high demand at peak hours, and then these systems would work at less than half of their capacity at the off-peak hours.

This will cause the capital or initial cost of building the system components to be very high, and the efficiency would go a little bit low when you operate power plants and transformers at a much lower level than their rated values, which would then cause losses to these companies.

The solution to this was to charge consumers based on a certain tariff structure that is called Time-Of-Use tariff (TOU).

This means that the company would charge a higher rate per kWh consumed during the peak hours, let’s say 4pm-9pm, and the normal rate during other hours.

TOU Makes Energy Companies Charge Differently

This will encourage the consumers to shift as much as possible of their consumption (e.g. laundry, dish washing, water heating, ironing, …etc.) to the off-peak hours in order to not pay the higher rates, and that would help the company to supply a stead demand across all hours with the same system size instead of building a bigger system that would work in full capacity for few hours and half of its capacity most of the time.

And the peak hours might be different from one place to another, and from one season to another, or even from weekdays to weekends, depending on the whether, the occupation of the area, and the behavior patterns of consumers.

This would lead to different electricity tariff rates between different energy companies, each charging the structure that is best for their system and profitability.

Average Consumer Demand

This factor affects the electricity tariff rates due to the fact that consumers in a certain location might use on average a different amount of energy per capita per month, compared to other consumers in another location or neighborhood.

Although most of the cost of energy on the utility is related to the cost of generation, and that should not be affected by the different average consumer administrative, but their are some infrastructure and administrative costs that are the same on the company, regardless of the consumer average demand.

And in case that the consumer average demand was low at a certain location, the company would make less net profit because the costs related to administration and maintenance will remain almost the same despite the low demand.

This would lead the company to charge higher prices of kWh energy consumed at that location, and sometimes they would offer a lower rate for people who exceed a certain usage per month, in order to sell more energy and make more profit.

Distances between Consumers

Some areas are dense in population, like New York and New Jersey for example, while other areas are much less dense, such as Nevada and Alaska.

This means that in less dense areas, the distances would be larger between consumers, and that would require more capital in order to install longer transmission lines and cables, and more transformers and other components of the grid, in order to finally serve the same number of consumers that another company would serve in a much smaller area in a highly dense area.

Distance Changes Energy Prices

And the larger the system, the bigger the team the company would need in order to operate and maintain the system, and the more it would need to spend on replacing certain parts of the system.

That means higher running costs in addition to the higher capital.

And if they were to operate profitably, the energy companies in these low dense areas might need to charge higher rates compared to other companies in highly populated areas.

Taxes

Companies need to pay taxes on the services they sell, and individuals need to pay sales taxes on what they buy, which are all reflected on the electric bill when it comes to services related to energy.

And the rates of taxes are different from one place to another, which are then reflected on the electricity bill through the different tariff rates that energy providers charge.

Competition and Free Market

Since the supply of energy is open to the private sector, this means that the government cannot completely control the prices that energy companies charge.

They can, and have to, put limits of course, and should take steps towards preventing monopolies that would drive the rates insanely high by some companies, but there would be a limit to what they control, and they should leave companies to compete against one another.

Some company might be able to buy energy or fuel at a different rate from the other, which means that they can now sell to the consumer at a lower price.

Some company might offer a better service, which means that they can charge a higher price and still maintain their customers.

Some might offer incentives by allowing consumers to pay with a credit card and get a cashback on their bill.

And so on.

This all would mean that each energy company would finally be a better choice for a certain group of people or for consumer in a certain sector.

And that all justifies charging different energy prices by these companies.

Conclusion – Never Worry about Different Electricity Prices Again

As you see, these were the main ten reasons why different energy companies charge different tariff rates for electricity.

What you can do is that you can choose which company to buy energy from based on the services they offer, their incentives, and your consumption volume and patterns, especially when it comes to TOU tariffs.

But there’s a limit to what you can do in order to end up with the lowest electric bill when it comes to choosing the supplier based on their tariff rates.

However, there’s a way that tens of thousands of families and businesses used in order to not worry about the electricity prices that different energy companies charge anymore.

It’s because these families and businesses have found a way to generate their own electricity through their own renewable energy systems, like wind turbines and solar panels.

Solar panels are still the number one source for consumers to generate their electricity and cut their bill almost entirely, since sun radiation is more predictable than wind.

And although there’s a cost associated to building a solar system to provide you with electricity and not worry about energy prices again, but there’s a solution for that so that you don’t pay a dime of your own money.

This is because big solar companies like SunPower for example can help you find the necessary funding for your solar plant so that you build a complete system to cover your demand, and without paying any down payment.

This will not only lower your electric bill significantly, or even eliminate it, but it will also increase the value of your home or business by having this system that was build to supply free energy for many years to come.

Avoid Different Electric Companies Tariffs

If you are a homeowner, or a business owner, and you are interested in seeing if you qualify for funding for your own solar plant, you can visit SunPower’s website in order to fill in your area’s zip code, answer a short survey about your place and current bill, and they will contact you to arrange for a free appointment to discuss the available options.

I hope that my article was helpful for you in finding out why energy companies charge different rates, and what you can do to not worry anymore about it.

If you still need any help or if you have any question related to this topic, please, tell me in the comments’ section below, and I will do my best to help you out 🙂

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