How is the price of electricity determined?

The price of electricity is determined by many different factors, and its formation is a complex process that includes both market forces and regulation. In this article, we look at how the price of electricity is determined and what factors affect it.

Electricity market

The price of electricity is mainly determined in the electricity market, where demand and supply meet. The electricity market can be divided into two main parts: the wholesale market and the retail market.

• Wholesale market: In the wholesale market, electricity producers sell electricity to electricity companies and large industrial customers. Wholesale market prices are often determined by the auction principle, where different producers offer electricity at different prices, and supply and demand meet at a certain price point.
• Retail market: In the retail market, electricity companies sell electricity to households and small businesses. Retail market prices are based on wholesale market prices, but other costs are also added to them, such as transportation and distribution costs as well as taxes and fees.

Demand and supply

Demand and supply are key factors in determining the price of electricity. Electricity demand varies depending on the time of day, day of the week and season. For example, in winter the demand for electricity is usually higher due to the need for heating, while in summer the demand may be lower.

On the supply side, electricity production capacity and production costs affect the price. Different forms of production, such as nuclear power, hydropower, wind power and fossil fuels, produce electricity at different costs. For example, renewable energy sources such as wind and solar power can produce electricity cheaper, but their production is dependent on weather conditions.

Regulation and taxation

The electricity market is regulated in many ways, and regulation has a significant impact on the price of electricity. For example, an emissions trading system that sets a price for carbon dioxide emissions can raise the price of electricity produced from the use of fossil fuels.

Taxes and fees, such as value added tax (VAT) and electricity tax, also increase the price of electricity for consumers. The amount of these taxes and fees varies from country to country and can significantly affect the price of electricity.

Political and global factors

Political decisions and global events can also affect the price of electricity. For example, geopolitical tensions can affect the prices of energy raw materials such as oil and gas, which in turn affects the cost of electricity production.

Furthermore, energy policy, such as supporting renewable energy or limiting the use of fossil fuels, can affect the price of electricity in the long term.

Summary

The price of electricity is determined by many different factors, and its formation is a complex process. Supply and demand, production costs, regulation, taxation, and political and global factors all affect the price of electricity. By understanding these factors, we can better predict and manage electricity price fluctuations.

You can read more information about the determination of electricity prices, for example, on Energiavirasto’s website and from Fingrid’s website.