Struggling to understand your electricity contract or read your electricity bill? Buying and paying for electricity for many individuals and businesses is a test in mathematics. However, it doesn’t have to be. There are two key concepts to understand about the electricity market. First, how electricity gets from the producer to your home or business; and second, how it is priced.
How are Electricity Rates Determined?
The price of electricity is determined based on a reverse auction that takes place every hour.
REVERSE AUCTION: A type of auction in which the roles of buyer and seller are reversed. The sellers compete to obtain business from the buyer and prices decrease as the sellers underbid each other. The lowest bidder wins. ~Wikipedia.org
- Producers who wish to sell electricity submit supply offers with price bids to the market on a day-ahead basis for every hour, 24 hours a day.
- AESO facilitates the auction. Producers’ bids are sorted from lowest to highest price for each hour of the day. AESO Controllers start with the lowest bid and continue down the list until the amount of electricity required for the hour is met. This ensures that Alberta’s overall electricity needs are met by the most competitively priced electricity.
- Hourly pool price is determined by averaging the highest bid received every minute at auction for that hour. The average of these 60 bids is posted to the AESO website at the end of the hour and used to calculate payments to retailers and ultimately to consumers.
- Retailers purchase electricity at the monthly pool price to sell to consumers. The monthly rate is a derivative of the hourly pool rates over the course of a month.
Why do different Retailers offer different rates? Doesn’t everyone buy the electricity at auction for the same price?
Yes, all Retailers must buy electricity at the same price, but there are other factors that affect the price Consumers pay.
Retailers try to anticipate if market conditions will result in an increase or decrease to the pool price in the future/over a period of time. This is a bit of a gamble which is partially why Retailers offer different fixed rates with different terms.
Competition and Consumer Expectations
Much like groceries or gasoline, different retailers charge different mark-ups on their product and adjust pricing based on consumer reaction and competition in the marketplace. In Alberta, we are lucky as consumers to have a choice where we purchase our electricity and natural gas. At LEAP, we want to help you save - not only by offering competitive, market-leading rates - but by helping you become more energy efficient to USE LESS & SAVE MORE!