To see why electricity rates rise in the summer, it helps to understand the types of electricity plans and how they fundamentally work.
How does electricity pricing work?
To begin, there are two types of electricity plans: fixed rate plans and variable rate plans.
Both have upsides and downsides, and these plans exist because electricity cannot be stored. Your home is always pulling in electricity, and the power plants are always producing electricity and the utility delivers that electricity, regardless of the plan or supplier.
The supplier comes in to the equation by purchasing energy on the market, and offering different types of plans to customers.
Fixed rate Vs. variable rate
Fixed rate plans are where you pay the same rate (price per kWh) each month, regardless of the market price or your usage, at a fixed rate.
Variable rate plans mean your electricity rate varies on market rate and time of usage. You could be paying less, or you could be paying more. For example, electricity is often more expensive when more people are using it, so at 7pm electricity market prices will be higher than at 1am that evening. By choosing a variable rate, individuals can take advantage of significantly lower electricity rates at “off hours”.
So, suppliers must balance purchasing energy on the wholesale market with offering fixed rate and variable rate plans to consumers.
In the summer, energy usage goes up.
Because of the warmer weather in the summer, the overall energy usage rises. That means more people are using more electricity, which means that the market on electricity goes up.
As the market prices rise, the suppliers purchasing electricity off the market must pay more for that electricity. It’s the same as natural gas and cold weather. That’s why electricity rates rise in the summer.
