What are marginal cost electric rates?

Understanding marginal electric costs is essential for various purposes, including pricing, economic efficiency, and energy policy decisions. The marginal cost of electricity is the additional cost incurred to generate one more unit of electricity. It represents the variable costs associated with producing and delivering electricity in the short term.

Components of the marginal cost of electricity

1. Fuel Costs: For power plants that use coal, natural gas, or oil for generation, the marginal cost includes the cost of purchasing and burning additional fuel to generate more electricity.

2. Variable O&M Costs: Operations and maintenance (O&M) costs that vary with the level of electricity production contribute to marginal costs. Examples include labor, maintenance, and repair expenses of running the plant.

3. Generation Efficiency: More efficient plants have lower marginal costs because they require less fuel to produce the same amount of electricity.

5. Renewable Integration: For renewable energy sources like wind or solar the marginal costs can be very low once the infrastructure is in place, as there are minimal fuel or variable O&M costs. However, the marginal costs are less controllable, due to the variability of sunshine and wind. Hydro power has low marginal costs as the flow of water can be controlled. As more renewable energy is integrated into the grid, marginal costs may be affected by the need for backup generation or energy storage to compensate for variability.

6. Market Conditions: In deregulated electricity markets, marginal costs fluctuate based on the impact of pricing on supply and demand.

7. Transmission congestion: Transmission congestion costs fluctuate depending on the availability of market transmission access. Generators may be able to produce additional power, but the transmission system in the region may not be able to handle the additional load without driving nodal prices up to a point where costs cannot be recovered.

8. Demand Response: Demand response programs to reduce electricity demand during peak periods may drive down marginal costs due to reduced congestion costs.

9. Energy Storage: Integration of energy storage technologies influence marginal costs by enabling the shifting of electricity generation to different times when it is more cost-effective. As energy storage continues to grow, the effect of energy storage on marginal costs will become more pronounced.

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Margin rates - one more option to match rates to changes in electric production

Marginal cost rates can be developed for large load additions to an electric cooperative or utility customer base. Once base load infrastructure costs have been covered by rates, the additional costs incurred by adding a larger customer load can be determined and added to the cost of service allocation for that customer. Time of use rates are used to alter customer behavior but may not forestall infrastructure needs. the marginal cost approach allows a transition between current resources and additions to the co-op or utility load curve.

About Russ Hissom - Article Author

Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.  

Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.

The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.