Why electricity prices change throughout the day

There are two different prices of electricity, and most confusion about this subject comes from mixing them up.

The wholesale price is what it costs to supply power to the grid at a particular place and time. It moves constantly. The retail rate is what your utility charges you per kilowatt-hour, and for most households it barely moves at all.

This article is mostly about the first one, and about why the second one usually does not follow it.

How often wholesale prices are actually set

Not continuously, and not by the second.

In the regions served by a regional transmission organization, wholesale electricity is priced at specific locations on the grid. The EIA calls these locational marginal prices, "location-specific prices developed within the RTO," and notes that price maps for them "are updated often, usually every five minutes."

There are also two markets running, not one. The day-ahead market sets prices in advance for each hour of the following day; the real-time market handles the difference between that plan and what actually happens.

A note on what the EIA source actually says here: its remark that some grid operators "provide both day-ahead and real-time maps" while "other RTOs map only real-time prices" is about which price maps those operators display. It is not a statement about which markets they run, and it should not be read as one — an operator whose referenced map shows only real-time prices may perfectly well operate a day-ahead market too.

So the right mental picture is a price that is re-set at short, regular intervals through the day — and settled against a schedule agreed the day before — rather than one that ticks continuously like a share price.

Demand follows a shape, and the shape is predictable

The reason the price moves is that demand does, in a pattern that repeats.

The EIA publishes hourly demand for the whole American grid. For its own reporting it uses a standard convention: on-peak hours "generally refer to the hours beginning at 7:00 a.m. until 11:00 p.m. on weekdays," with off-peak hours "between 11:00 p.m. and 7:00 a.m."

The seasonal shapes differ:

• In summer, consumption "increases rapidly through the day along with temperature, reaching its maximum around 5:00 p.m. or 6:00 p.m."
• In winter, the daily cycle "usually has a morning peak and an evening peak" — people wake up, then come home.
• The summer cycle has a much wider range than the winter one, because of air conditioning.

This is measurement, not a model. Anyone can go and look at it.

One important caveat about "peak hours"

The 7 a.m. to 11 p.m. window above is EIA's convention for national reporting. It is not a universal definition and it is not necessarily the window that applies to you.

Each grid operator and each utility sets its own peak periods, and they differ by region, by season, and by the specific rate a customer is on. A utility's time-of-use peak window is typically much narrower than EIA's broad on-peak block. If you want to know the peak hours that affect your own bill, the only authority is your utility's rate schedule.

Why the cost of serving those hours differs

Grid operators call on generators roughly in order of cost: cheapest first, then the next cheapest, until supply matches demand. The price is generally set by the last and most expensive resource that had to run.

At 3 a.m., demand is low and only the cheap end of that stack is needed.

At 6 p.m. on a hot day, the operator has to reach much further up it — to generators that run mainly to cover those few hours and that cost more per unit of energy they deliver.

The EIA puts the point directly: "Electricity demand is usually highest in the afternoon and early evening (peak hours), so costs to provide electricity are usually higher at these times."

Fuel is a large part of why. The EIA notes that "natural gas prices set the marginal price of electricity during most hours in most regional markets," which is why wholesale prices track gas prices closely.

Several other things move the stack around:

1. Fuel prices generally. Natural gas and petroleum fuel costs "may increase during periods of high electricity demand."
2. Weather. "Extreme temperatures can increase demand for heating and cooling, and the resulting increases in electricity demand can increase fuel and electricity prices."
3. Transmission and distribution. The wires have their own costs, including maintenance, repair and cybersecurity.
4. Regulation. Whether a state's retail prices are set by a regulator or by a competitive market changes how, and how fast, wholesale costs reach customers.

Why your bill probably does not show any of this

Here is the part that surprises people. The wholesale variation is real and large, and most households are insulated from it.

The EIA states it plainly: "Most retail customers pay prices based on the seasonal average cost of providing electricity and do not experience these daily price fluctuations."

A typical residential bill charges one rate per kilowatt-hour — perhaps a different one in summer than in winter — regardless of whether the energy was used at 3 a.m. or at 6 p.m.

It is also worth saying that a retail rate is not just a wholesale price with a markup. It has to recover the cost of the power plants, the transmission and distribution network, and whatever else the regulator allows. The energy itself is one component of several.

Some utilities do offer time-of-day pricing, which the EIA describes as a way to encourage conservation and reduce peak demand. Where it exists, the hours and the rates are set by that utility.

If you want to check any of this yourself

The EIA's Hourly Electric Grid Monitor publishes demand for the US grid, updated hourly for the previous hour, along with hourly demand forecasts, generation and interchange data, and history reaching back to July 2015. It is free and needs no account.

If you would rather see your own region's daily curve than read about it, that is where to look.

What is confirmed, and what is not

Confirmed, from federal data: EIA's on-peak and off-peak reporting convention, the summer and winter demand shapes, the five-minute update interval for wholesale price maps and the existence of day-ahead and real-time markets, the role of natural gas in setting the marginal price, the listed cost drivers, and the statement that most retail customers do not see daily fluctuations.

Analysis, not fact: the description of generators being called on in cost order is the standard account of how these markets work, and it is a simplification. Real markets add reserve requirements, transmission limits and other constraints that can change which resource sets the price. The explanation of what the day-ahead and real-time markets each do is the general structure of a two-settlement market, not a quotation — the cited source confirms that prices update about every five minutes and describes which maps particular operators display, not the division of labor described here and not which operators run which markets. The characterization of a retail rate as recovering several categories of cost follows from the cost drivers EIA lists; the specific allocation is set by regulators and varies.

Not known from these sources: your own rate structure, your utility's time-of-use windows if it has any, or whether moving to such a rate would save you money. None of that can be derived from national demand data.