1) Where does electricity come from?
2) What factors determine the price of electricity?
3) How much electricity do appliances use?
4) How does Entergy measure electricity?
5) What charges affect my electricity cost?
6) Why does my electric bill seem higher?
7) Maybe your bill hasn't gone up but you just think it's always been high?
8) Where does my money go?
9) What factors will impact energy rates in the future?
Electricity is an essential part of modern life. We use it to light, heat and cool homes and businesses and power appliances and electronics. Electricity is such an integral part of everyday life that most people only think about it when the power goes out or when the electricity bill arrives. Fortunately in the United States, power outages are infrequent and short in duration mainly because we have one of the most advanced, reliable and well-maintained electricity distribution systems in the world. Consistent with a monthly type of service, customers receive electricity bills monthly. The dollar amount charged depends on the fuel used by the electric utility company and the amount of kilowatt-hours consumed. Other add-ons to your bill include state and local taxes and other charges such as local franchise fees and special line items to pay for specific items such as a power plant or storm restoration.
Further understanding of your monthly electric bill, and the history of retail electricity prices, begins with a discussion of the basics of how electricity is produced and delivered to the average residential customer.
1) Where does electricity come from?Electricity is delivered to you by the local utility through a network of existing transmission and distribution lines, often called the “grid.”
- Transmission lines are the large, high-voltage power lines that move large amounts of electricity from power plants to substations and are often supported by tall metal towers. In terms of the amount of electricity moved by transmission lines—these are like the super highways. Smaller, lower voltage distribution lines move power from substations and transformers, and are often seen along residential streets supported by wooden poles.
- Distribution lines are like main streets and side roads. Most of the existing electricity grid was built during a highly structured, highly regulated era designed to ensure that everyone in the United States had reasonable access to electrical service. Utility customers, through fees authorized and regulated by state regulatory commissions, generally paid for developing and maintaining the grid that brought electric service to them. Utilities build power-generating plants and connect the plants to the electrical grid, which distributes the electricity to you. The amount of electricity you use is measured with a meter (Figure 1)*.
2) What factors determine the price of electricity?
There are two major components that determine the price of electricity — fuel and the rates. The cost of fuel such as coal, natural gas and oil is strictly paid to the fuel company for the actual cost of the fuel used to generate electricity for each individual customer. Entergy acts as the agent that pays the fuel company with the portion of your bill itemized as fuel. By law, Entergy makes no profit on fuel costs. Rates (called the “energy charge” on an Entergy bill) pay for the transmission and distribution necessary to deliver the power to you, as well as construction costs of plants and the associated expense for operation and maintenance of the system. Supply and demand for fuel and transmission, international events and changes in weather can also affect the price of your electricity by impacting customer usage or the price of electricity if a company must purchase it from the market. This is part of the “fuel and purchased power” charge on your bill. In some areas, certain costs to generate electricity fluctuate daily and monthly. These fluctuations are a response to changes in demand for electricity. Daily demand for electricity is usually highest in the afternoon and early evening (on-peak). Seasonal peaks reflect regional weather and climatic conditions, with the highest occurring in the summer when air-conditioning use is greatest.
Power plants tend to operate in three basic modes: baseload, load-following and peaking load.
- Baseload power plants are large plants that run around the clock and generally use stable-priced solid fuels such as nuclear and coal.
- Load-following plants are able to be ramped up and down quickly to meet the daily and seasonal ebb and flow of demand. Peaking plants are turned on or “dispatched” as demand increases above the normal base demand or load.
- Peaking plants are more expensive to operate, often fueled by refined oil products, or natural gas, and have a fuel cost per kilowatt-hour (kWh) higher than a baseload plant.
Most investor-owned utilities are monitored and regulated by the Federal Energy Regulatory Commission, state public service commissions and in the case of Entergy New Orleans, Inc., the City Council. The breadth and scope of regulation varies by state. Only some states allow full competition for generation and the deregulation that comes with it. Restructuring to increase retail choice availability varies by state. The states that Entergy serves do not allow for competition in the areas served by Entergy. For instance, Texas is a competition state, but the Texas Public Utility Commission will not allow Entergy’s service territory to go to a competitive model.
Your electricity use will determine your total bill. Your total bill for the month, before taxes and other add-ons, is the price per kilowatt-hour multiplied by the number of kilowatt-hours you have used during the month.
3) How much electricity do appliances use?
Source: entergy-texas.com/ENsight entergy-louisiana.com/ENsight entergy-neworleans.com/ENsight entergy-arkansas.com/ENsight entergy-mississippi.com/ENsight
Visit entergy-texas.com/ENsight entergy-louisiana.com/ENsight entergy-neworleans.com/ENsight entergy-arkansas.com/ENsight entergy-mississippi.com/ENsight for instructions on calculating the electrical use of your appliances.
Improving codes and standards are helping to increase energy efficiency of many home appliances and electronics. A classic example of the impact of codes and standards is refrigerator efficiency; where size and efficiency has increased, but price has declined. A similar codes and standards impact may be in the future for TV set top boxes, where today 2 TV set top boxes consume as much energy in one year as a refrigerator. Another impact on energy usage is the increased number of LCD and plasma TV’s in homes. As consumers convert from their “old” flat screen to a plasma, they can expect to use 2.5 times more energy while the set is on.
4) How does Entergy measure electricity?Before we see how much electricity costs, we have to understand how it is measured. You buy gasoline by the gallon. Electricity use is measured by kilowatt-hours. When you use 1000 watts for 1 hour that is a kilowatt-hour(kWh). For example:
| Device Wattage | Device | Hours Used | kWh |
| 1000 watts | medium window-unit AC | one hour | 1.00 kWh |
| 1500 watts | large window-unit AC | one hour | 1.50 kWh |
| 500 watts | small window-unit AC | one hour | 0.50 kWh |
| 24 watts | 42" ceiling fan on low speed | 10 hours | 0.24 kWh |
| 100 watts | light bulb | 731 hours (i.e., all month) | 73.10 kWh |
Watts and watt-hours
Watts is the measure of the rate of electrical use at any moment. For example, a laptop computer uses about 50 watts. If your device lists amps instead of watts, then just multiply the amps times the voltage to get the watts. For example:
2.5 amps x 120 volts = 300 watts
Watts is the rate of use at this instant. Watt-hours is the total energy used over time. To measure use over a period of time, we use watt-hours. Watts or kilowatts measure the amount used at a given instant, and watt-hours or kilowatt-hours for the amount over a period of time.
5) What charges affect my electricity cost?The cost of electricity depends on where you live, the cost of the fuel used to generate electricity, how much electricity you use, and possibly when you use it. The electric company measures how much electricity you use in kilowatt-hours, abbreviated kWh.
6) Why does my electric bill seem higher?To figure out why your electric bill seems higher, the first thing you need to do is to figure out what is normal. If your bill has spiked recently, look at your old bills and see if your usage has gone up. Look only at the amount of electricity you used in kilowatt-hours(kWh). Do not look at the cost, because the cost could have gone up for other reasons, such as an increase in the cost of fuel.
If your kWh usage is similar but the cost is now higher, then the reason why is on your bill. Check to see if the price of fuel went up, or if you are being charged for city services besides electricity.
7) Maybe your bill hasn't gone up but you just think it's always been high?In that case the first thing you can do is to compare your usage to what is normal. A typical American family uses an average of 1000 kWh per month, as we see on the electricity costs chart. If you are anywhere near that with a 3-person household you are normal. Normal may not mean good, though, since most people waste lots of energy.
The average cost of residential electricity was 11 cents per kWh (Department of Energy-DOE) in the U.S. in April 2008. The average household used 920 kWh per month in 2007 (DOE) and would pay $101.20 based on the April 2008 average rate. The cost of electricity varies by region. In 2008 the price ranged from 6.7 cents in Idaho to 30 cents in Hawaii. Click here for 2008 data
8) Where does my money go?The simple fact is that the electric utility business is essentially no different than any other business. The costs of doing business – running power plants, paying employees, buying fuel, insurance and taxes – are all paid for through the price of the product and service we provide.
For instance, a gallon of milk includes the cost of the cow, the cow’s food, medical care for the cow, the farmer’s equipment, the farmer’s taxes and salary, the interest on loans, the machinery used to make, process and bottle the milk, the bottles, the trucks used to deliver the milk, the fuel in the trucks, the store employees and refrigeration units and the store’s taxes and insurance fees, etc.
The only real difference is that 1) you use the utility’s product before you pay for it, 2) the utility cannot raise or lower the price of the product to cover its costs without the permission of the local and sometime federal regulator.
The electric utility industry is among the country’s most capital-intensive sectors, with many of its costs stemming directly from investments in and maintenance of the power plants, transmission and distribution lines, equipment and structures that are used to deliver electricity. Utilities typically cannot recover their costs as they are incurred; instead, they are required by regulatory authorities to spread their costs to customers over the physical life of the investment — sometimes as long as 30 years — under the assumption that there will be a stable customer base.
While all electric utilities use similar methods to generate electricity, each operates differently to meet the unique needs of its service area. Variables such as regulatory policy, usage patterns, fuel availability and geographic conditions have a major impact on the cost of providing service, and, therefore, on electricity prices.
Most of the revenue utilities receive is used to pay operating and maintenance costs. Power purchased from “merchant” power plants or other utility companies and fuel are the largest operating expenses for an electric utility; taxes are the next largest expense. The cost of salaries, materials, supplies, services and a variety of other expenses also must be met. In addition, the utility, like other businesses, must pay for the cost of depreciation, amortization, and the cost of capital, which includes the return paid to debt and investors for the use of their money.
Today, the electric utility industry is facing steadily increasing costs to generate and deliver electricity to American homes, businesses and industries. While electric utilities make continuous efficiency improvements and are working closely with regulators to contain costs and to keep electricity prices as low as possible, the bottom line is that rising costs are becoming inevitable throughout the United States.
9) What factors will impact energy rates in the future?Generating Electricity
Electric utilities use a variety of fuels to generate electricity. Fuel prices greatly affect the price of electricity. After peaking in the early 1980s, fuel prices trended downward until 1999. Economists point to these decreasing fuel prices as an important reason for the lower, more stable electricity prices during this time period.
However, fossil fuel prices have risen considerably since 1999, particularly for natural gas. Electric utilities take steps to help shield customers from these rising fuel costs. For example, they try to diversify the fuels they use to avoid becoming too dependent on a single fuel and volatile price swings. Utilities frequently try to limit market volatility by “hedging,” or entering into long-term, fixed contracts at set prices. But such forward contracts cannot cover all of their fuel needs. At some point, customers inevitably will see these rising fuel costs that electric utilities must pay reflected in their electric bills. But remember, companies like Entergy do not profit on fuel costs. These are “pass throughs” and Entergy only charges the customer exactly what it paid for the fuel.
Demand
While efficiency improvements have had a major impact in meeting national electricity needs relative to new supply, the demand for electricity continues to increase. According to the U.S. Department of Energy’s Energy Information Administration, consumer demand for electricity is projected to grow at an average rate of 1.5 percent per year through 2030. Overall, electricity consumption is expected to increase 45 percent by 2030.
To meet this increasing demand for electricity and to ensure fuel diversity and reliability, electric utilities must invest in new base load power plants. According to EIA, 347 gigawatts of new capacity will be needed by 2030. That is enough energy potential to power 347,000 average American households. Based on EIA assumptions, if all of this new capacity is built, costs would be in excess of $300 billion (2005). It is likely that electricity demand could be 200 GW more than otherwise expected, were it not for energy conservation and efficiency programs.
The utility industry has been planning for the additional capacity needed to meet long-term growth in electricity demand and to mitigate exposure to high fuel prices.
Investment in Infrastructure
In addition to building new power plants, electric utilities must reinforce the nation’s electricity delivery infrastructure, namely, the high-voltage transmission lines, substations and distribution systems that carry electricity to the customer. Though we continue to enjoy the world’s most reliable electric system, the reality is that more investment is needed to ensure we have a robust network of “pipes and wires” to keep it that way.
This presents challenges. First, investment in power lines lagged behind growth in demand for electricity during the 1980s and 1990s. Second, regulatory rules and market structures were revised in many areas of the country to create more competitive power markets at the wholesale level. This has increased demand for use of the transmission grid. In order to build the system to better meet current and future demand, to alleviate congestion, and to reinforce system reliability, electric utilities have earmarked billions of additional dollars for investment in the coming decade.
Investment in transmission has increased 116 percent since 1999, and electric utilities are planning to invest an additional $18.5 billion through 2008 on transmission infrastructure — a 25-percent increase over the previous three years.
Environmental Compliance
Still another major financial challenge looms for the electric utility industry — the massive price-tag for compliance with environmental regulations. All electric utilities are subject to literally hundreds of environmental rules, including dozens of federal and state air and water quality requirements created in the wake of the Clean Air Act and Clean Water Act.
The combined impact of these regulations — and newer regulations — is the annual expenditure of billions of dollars to help ensure protection of the air, land and water. From 2002-2005, the electric utility industry as a whole spent $24 billion on compliance with federal environmental laws; state and local rules drive that total even higher.
Electric utilities are more than ready to do their share to help preserve and improve our nation’s environmental quality, and the evidence is there to support that. Since 1980, air quality in the United States has improved dramatically, and emissions of nitrogen oxides and sulfur dioxide have fallen significantly — all during a time in which demand for electricity increased.
But the costs associated with continuous environmental improvements are significant. For example, according to the U.S. Environmental Protection Agency, complying with two new federal regulations — the Clean Air Interstate Rule and the Clean Air Mercury Rule, which are aimed at further reducing power plant emissions of NOX, SO2 and mercury — will cost the electric utility industry $47.8 billion between the years 2007 to 2025. As utilities enter another phase of emissions reductions, those costs will be reflected in customers’ electric bills and must be borne equitably by all customers on the system.
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