Power Economics

Chapter 9Pricing Energy: It's Complicated

The power economy is a complicated beast, shrouded in lore and mystery. In this chapter, we will pull back the curtain and reveal the inner workings of the strangely convoluted ecosystem that supplies power to our homes and businesses. We will also look at some of the main drivers of price fluctuations in energy markets. These drivers include fracking, power plant decommissioning, and the steady rise of renewable energy.¹

The net takeaway here is that energy markets aren't like the markets you studied in high school or college. I can't say with certainty what Adam Smith, author of The Wealth of Nations, would have thought about energy markets, but I can imagine him rolling his eyes at their tangled complexities and inconsistencies.

One of the first notions we need to discard is the idea that electricity is a natural resource. Electricity is a product. It can be generated in a variety of ways, all of them requiring energy and equipment. Electricity is neither magical nor free.

Generating electricity involves costs and those costs have to be paid. In the United States, most electricity is produced through the burning of nonrenewable fossil fuels such as oil, coal, and natural gas. Electricity is also produced from sources such as running water (hydropower), sunlight (solar power), wind, ocean currents, thermal energy, and nuclear energy.

To get a sense of scale, here's a handy summary from the US Energy Information Administration (EIA) ...