What Drives Power Prices in SummerBy Javier Loya
Heat, demand peaks and the cost of the last power plant called on all shape what electricity costs on the hottest days of the year.
Electricity is hard to store at large scale, so supply and demand have to match almost instantly. That basic fact explains much of why wholesale power prices move the way they do when temperatures climb.
Demand follows the thermometer
Air conditioning is one of the largest drivers of electricity use in hot climates. As afternoon temperatures rise, millions of systems run harder at the same time, and demand climbs toward its daily peak. Those afternoon peaks set records: ERCOT reports a record peak demand of 85,508 megawatts.
The last plant sets the price
In many wholesale markets, power plants offer electricity at different prices, and grid operators dispatch the least expensive offers first. As demand grows, more expensive units are called on. The price paid in a given interval is often set by the last unit needed to meet demand, so a hot afternoon can lift prices for every megawatt-hour sold in that period.
Fuel and the sun
Natural gas plants supply a large portion of power during peaks, so the price of natural gas feeds directly into electricity prices. Solar output tends to be strong during the middle of the day and falls in the early evening, while demand often stays high. That evening window can be a tight period for the grid.
What it means for customers
Retail customers on fixed-rate plans are generally insulated from short-term wholesale swings for the length of their contract. Customers on variable or indexed plans can see wholesale movements reflected more directly. Knowing which kind of plan you have is the first step in understanding how summer markets can affect a bill.