Low Supply, High Demand: The Effects of Fossil Fuel Supply on Electricity Costs

It’s that time again. No, it’s not the back to school season or the end of your vacation. It’s the time of the year when electric bills traditionally begin to rise, and you get that first bill after the prices have gone up. Have you ever noticed that you’ll see a certain price range on your electric bill from January to June, and then that price will change from July through December? This is because most major electricity companies such as and NStar (now EverSource) and National Grid here in Massachusetts purchase their electricity in six month blocks. The prices for these bulk purchases are affected by a number of different market factors: 1) the availability and the cost to produce the electricity and 2) the cost and availability of those materials that are used in generating this electricity. All these costs, in addition to the ever increasing costs of maintaining one of the nation’s oldest electrical grids, means that year by year the price of electricity steadily rises.

But, that’s no surprise. The surprising thing is in the past year and a half electric companies, namely EverSource and National Grid, have raised their rates sharply between 20 to 30% within as little as six months. National Grid recently announced that they will be raising their rates another 20% again, even though they lowered their rates a bit from the last pay price hike. The question still remains on everyone’s mind: What exactly is the cause for all these rate hikes? You can find the answer at your nearest gas station.

It is no surprise that our electricity or the majority of it is produced from fossil fuels such as coal and oil. It is also no surprise that cars gain their power from the same type of non-renewable resources. So as the prices for these resources increase it only makes sense that the prices of our electricity will rise as well. As the stability of the availability of these resources becomes less certain, their value in our global marketplace tends to increase and that increase trickles all the way down to us. But how exactly does that work, especially since this past summer we had record low prices for gas while at the same time Massachusetts homeowners paid record high prices for electricity and if that is the case where is the justification in this new 20% price rise? The answer is still supply and demand but with a twist.

In the energy world, fuel switching refers to the process of changing from one form of a fuel material such as coal, to another form of fuel material such as natural gas. This process specifically refers to the changing of equipment that is associated with this switch. Think of this grade school analogy: when writing with a pencil you, need to sharpen your pencil and make sure you have enough of an eraser just in case you make mistakes. When you are introduced to a mechanical pencil, the work of sharpening a pencil is no longer required as the pencil itself is not made out of wood, but rather you have dispensable led that is used to do the writing. If you switch from a wood pencil to mechanical pencil, you will initially have to pay for the mechanical pencil and oftentimes the led, but once the pencil is purchased, you only need to purchase led. And by the way, no more messy desks from sharpener shavings. If the cost of led becomes cheaper, in the long run, it is a better idea to switch to a mechanical pencil some would say. In the long term you are saving on the price of led, but the initial cost to make the switch can be a bit shocking.

Hence the situation of our electricity because the coal and natural gas production of electricity work in tandem, depending on the price of coal and the price of natural gas electricity producers might switch from one form of production to another. In our case, with a decrease in natural gas price this switching from coal generation to natural gas generation induce the mechanical pencil effect whereby the cost of switching from coal power plants to natural gas power plants cause the overall generation cost of electricity to rise.

At the end of the day, the price for gas and there by electricity is based on consumption meaning the more we use the more they’ll be in need the more there’s a need the greater the need to find out how we can get more. With all that said what can we do? In the case of the mechanical pencil effect, we can use a pen: by finding ways to be more efficient with our electricity and energy consumption overall. The less we use the less electricity that will need to be made the more funds that will be in our pockets and in the end the happier the environment will be.

Article Written By: Lumyr D.~ Solar Consultant, Rayah Solar

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