Personal finance is an important part of education often overlooked and learning to understand and mange the bills relieves a lot of grief. Today we look at an electric bill and break down the fascinating bits.
Here is my electric bill from Sept 10 to Aug 15th.
I share a room in a 5 bedroom house. On the left you see that over 26 days we used 373 kilo watts hours of energy.
To put this in perspective. An Led Bulb takes 9W and produces as much light as a 60W incandescent light. 9W = 0.009 kilo Watts (kW) so using it for 1 hour means 0.009 kWh of energy is used. If I used this light continuously for 4.6 days I would rack up 1 kWh.
To put this in perspective. An Led Bulb takes 9W and produces as much light as a 60W incandescent light. 9W = 0.009 kilo Watts (kW) so using it for 1 hour means 0.009 kWh of energy is used. If I used this light continuously for 4.6 days I would rack up 1 kWh.
Now lets get back to the bill.
There are two types of charges an electric company charges.
There are two types of charges an electric company charges.
Delivery charge - this is the power lines that bring the electricity to you. Remember from physics that bringing power from long distances results in some energy loss and that storing energy is expensive. There is also cost associated with maintaining the power grid including the many security concerns. |
Of these two charges the delivery charge tends to fluctuate the least. For the sake of simplicity - lets assume they are static for the whole year.
The total charge for delivery will be the sum of all of these charges as explained here. Delivery cost per kWh is 8.3 cents. |
Supplier charges. Energy is created from resources and the price of those resources such as natural gas, coal, oil, or nuclear depends on the supply and demand of those resources. To get coal you need to know where coal is, then you need to mine and extract coal, then ship it to the power plant where you burn the coal to heat the water to make steam to spin a turbine and make electricity - woo! (That's the 1,000 mile view of the process - there's loads more that goes into it).
Now lets say you are the proud owner of a coal power plant. You don't know for sure how much coal to get for next month because in the future the natural gas power plant down the road might be able to get natural gas cheaper and thus sell energy for less driving you out of business because everyone is now buying all their energy from the gas power plant.
On the other hand, suppose the gas power plant has an accident and can now only supply 1/2 of what they used to. Now the supply for energy has gone down and so people have to pay more for power and you wish that you had bought more coal to sell at this new high price.
Uncertainty is part of life, but there is a way around it: insurance. Suppose a third part promised to buy your energy at the current market price 3 months from now no matter what price the market is selling at. In fact they would trade you a slip that said they would buy 100 kWh from you 3 months from now for the market price today if you told them to but in return you have to give them 10$ per slip. Now you the coal owner know that you are safe to buy the coal you need to burn because someone has to buy the energy you make. You the coal owner have just bought a insurance. (This by the way is how derivatives work and this is what many trading companies trade. Here is a small video showing you a simple derivative)
Now lets say you are the proud owner of a coal power plant. You don't know for sure how much coal to get for next month because in the future the natural gas power plant down the road might be able to get natural gas cheaper and thus sell energy for less driving you out of business because everyone is now buying all their energy from the gas power plant.
On the other hand, suppose the gas power plant has an accident and can now only supply 1/2 of what they used to. Now the supply for energy has gone down and so people have to pay more for power and you wish that you had bought more coal to sell at this new high price.
Uncertainty is part of life, but there is a way around it: insurance. Suppose a third part promised to buy your energy at the current market price 3 months from now no matter what price the market is selling at. In fact they would trade you a slip that said they would buy 100 kWh from you 3 months from now for the market price today if you told them to but in return you have to give them 10$ per slip. Now you the coal owner know that you are safe to buy the coal you need to burn because someone has to buy the energy you make. You the coal owner have just bought a insurance. (This by the way is how derivatives work and this is what many trading companies trade. Here is a small video showing you a simple derivative)
Lets get back to the bill. This detour will serve useful later.
Now it should be clear that supplying electricity is not simple. Here's what Eversource says on the generation charges.
Now it should be clear that supplying electricity is not simple. Here's what Eversource says on the generation charges.
Generation Charges: This portion of your bill represents charges associated with the purchase of electricity only. Most residential customers have Eversource purchase electricity on their behalf - placing them on Basic Service. Because power is bought in an open market, this section of your bill tends to fluctuate more than the delivery charges on your bill.
Here's what Eversource doesn't state very clearly. This is where they get sneaky, so pay attention. Deep in their pretty broken website you see this:
Jan 1st to June 30th the rate goes up, July 1st to Dec 31 the rates go down. These rates are for Connecticut not Massachusetts. In MA, Rate 1 in 2015 (what residential people get) its 10.05 cents when it is not very cold outside (July 1 to Dec 31). Then when it gets cold the price jumps to 16 cents per kWh.
Caution: This policy may be Eversource specific. Eversource does not make this information easily accessible and I'm sure other companies do this to. Your best bet is to ask probing questions to your electricity provider like "Are your generation and delivery rates fixed and if not how and when do they fluctuate? Where can I find this information on your website? How do I set up autopay?"
Energy usage probably varies from place to place, but here's a graph for the breakdown.
Energy usage probably varies from place to place, but here's a graph for the breakdown.
When I was in Champaign, Illinois - here's how much energy I used (gas and electric). You will note that Jan through April when it got cold - we used a lot of gas that bumped the bill. In Massachusetts, we have oil heating which is more expensive than gas heating - but electricity tends to also jump because of space heaters, long hot showers, and possibly other reasons. |
Now It would be interesting to see how the cost per generation and delivery per kWh vary over the year but the bill is very complicated and the information is not readily available. None of the graphs I've encountered share this really useful information - I have a hunch it is intentionally hidden.
A stranger knocks on the door and says he can help reduce your electric bill by giving you a fixed rate as an energy supplier (direct energy in this case). What do you do?
- It's a scam - slam the door
- Check the yelp reviews on direct energy - slam the door
- Invite them inside
Many will say that it's a scam and slam the door.
This may or may not be true.
Some will immediately check online on yelp to see:
This may or may not be true.
Some will immediately check online on yelp to see:
and then slam the door.
Don't be too quick. Look at the review.
Well Direct Energy came to my door and offered me a 14 month fixed rate far lower than the historical Eversource Jan 1 - June 30 2014 rate with a no cancellation cost. After the 14 months they go to a variable rate which probably hikes the price per kWh. I plan on getting off the plan by July 1st next year.
This leads to the question - why would Direct Energy send someone to my door to offer me a better deal than my current energy provider - what do they get? My hunch is a cheaper insurance. If I'm Direct Energy I would assume that a customer won't go through the trouble of changing energy supplier, then I can get a soft guarantee that someone will buy my electricity. If they stick around long enough they get on the variable rate where I can charge more.
In any case, energy bills are complicated and it serves well to get some background knowledge and put in effort to understand how to consume energy appropriately. Don't trust yelp reviews. Many people vote on yelp after they had a bad experience.
A good example of this is http://www.yelp.com/biz/nstar-boston
Eversource used to be called Nstar and you find a lot of negative feedback mainly on the billing side of things.
This leads to the question - why would Direct Energy send someone to my door to offer me a better deal than my current energy provider - what do they get? My hunch is a cheaper insurance. If I'm Direct Energy I would assume that a customer won't go through the trouble of changing energy supplier, then I can get a soft guarantee that someone will buy my electricity. If they stick around long enough they get on the variable rate where I can charge more.
In any case, energy bills are complicated and it serves well to get some background knowledge and put in effort to understand how to consume energy appropriately. Don't trust yelp reviews. Many people vote on yelp after they had a bad experience.
A good example of this is http://www.yelp.com/biz/nstar-boston
Eversource used to be called Nstar and you find a lot of negative feedback mainly on the billing side of things.
The reason the delivery charges exist is because maintaining the power grid requires a lot of effort and more money is needed for repairs and improvements. Energy also dissipates and needs to be stored. There are a ton of complex laws and terrifs that change with time and you have to do the due diligence/homework to avoid unexpected surprises.
Other reviews complain that when their power was cut their tv and internet also turned off. This shows that you must prioritize your bills - don't pay for tv and internet if you can't afford power because you need power to run both.
Other reviews complain that when their power was cut their tv and internet also turned off. This shows that you must prioritize your bills - don't pay for tv and internet if you can't afford power because you need power to run both.