Explaining Why Electricity Costs More When It’s Hotter Outside

If you’ve paid a home electricity bill for any length of time, you know it will be higher in the summer than in the winter. More importantly, you know why it will higher in the summer than the winter:

You run your air conditioner nearly all the time because it’s so hot outside.

Simply put, even if you’re on a fixed-rate plan where you pay the exact same price per kilowatt-hour every month, your bill will be higher when you use more energy in a given billing cycle.

But when it comes to truly understanding why electricity prices increase in the summer, higher electricity usage – also known as demand – is the simple part of the equation. The part that most of us don’t fathom concerns how the supply and generation of electricity is priced, as this has an outsized impact upon the price of electricity. That’s the part we want to explain.

Electricity Industry Basics

Residential and commercial energy customers live at the end of the energy food chain. You flip a switch, the lights come on, and you get a bill each month. All that matters to you is that electricity is there when and how you need it.

But at the other end of the line, you’ll find generation – the actual creation of the electricity you can use from raw materials. In the middle lives the utility companies who transmit and distribute the electricity to homes and businesses in its service territory and the retail electricity companies who purchase electricity on the wholesale markets.

Pretty simple so far – one company creates the energy, another company buys it, yet another one delivers it to homes and business, and each residential and commercial customer first uses it and then pays for how much is used.

But there’s a bit more to it than that.

The Details of How Electricity is Priced

Electricity prices vary every single minute, based upon what people are using in their homes and businesses. Supply has to match demand, or there will be brownouts and blackouts because of a lack of available electricity. Because of this, electricity demand is especially high during the “peak hours” of afternoon and early evening (you know, when it’s hottest outside), so electricity companies have to account for needing more supply at 4pm than they do at 8am.

To ensure they do have excess supply to account for a quick rise in demand, the electricity grid keeps more energy available than what people need most of the time. This concept is called the “reserve margin,” but people can still demand more energy than is actually available on the grid. So in order avoid the electricity grid expending that reserve margin, more electricity needs to be generated, and it often has to happen quickly. It is super-expensive to start creating more energy when demand skyrockets, as it requires starting up generators that are often silent.

In short, the more electricity people demand, the higher the prices of supplying that electricity. And since people demand more electricity to combat the hot summer weather, electricity prices will be higher in the summer because the very high costs of generating electricity when demand threatens to outpace supply.