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FAQ: Winter Pricing

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FAQ: Winter Pricing

February 8, 2022

The New York ISO (Independent System Operator) is an independent, not-for-profit 501(c)(3) corporation responsible for operating the state’s bulk electricity grid. We are not a regulator, nor an entity of New York State. We operate the grid under the strictest reliability rules in the nation and under the oversight of state and federal regulators to keep the lights on for all New Yorkers.

The NYISO is aware of, and concerned about, increased commodity prices and their impacts on consumer electricity bills. In this FAQ we explain why these cost increases are occurring, the role of wholesale markets in the final bill you receive, and what competitive wholesale electricity markets do to minimize costs to the consumer.

Household electricity bills include supply, transmission, distribution, and other charges approved by New York State. “Supply” charges in a typical retail electric consumer bill reflect procurement costs that vary by utility and are influenced by the wholesale cost of producing electricity. The NYISO’s wholesale electricity markets are designed to always seek out the least-cost solution to meet demand. Wholesale electricity prices are directly influenced by the cost of the fuels used to produce electricity. In New York, the cost of natural gas and the price of electricity are closely correlated. It is also important to note that commodity cost increases are occurring not only across the country, but around the globe. 

What role do wholesale prices play in retail electric bills?

The typical residential retail customer pays for their electricity through a retail rate approved by the state Public Service Commission. That retail rate is designed to capture both the wholesale price for electricity that the utilities pay as well as the costs of distributing that electricity through complex networks of substations, wires, and transformers.

The wholesale cost of electricity is often reflected in the  “Supply” portion of a typical retail consumer’s electricity bill. How wholesale electricity prices influence the “Supply” portion of a retail bill varies between providers, depending on their procurement and cost-hedging strategies. The components of retail electricity bills are regulated by the New York State Public Service Commission. 

The wholesale price of electricity is established through the NYISO-administered competitive markets. Every hour, every day of the year, these markets select the least-cost mix of suppliers to meet electricity demand throughout the state. In 2020, the wholesale electricity charges accounted for roughly 30% to 35% of the typical residential bill. With fossil fuel costs significantly higher going into this winter, the wholesale charges for electricity are likely to be a larger component of the overall retail electric bill received by consumers.

Wholesale electricity prices are directly influenced by the cost of the fuels used to produce electricity. In New York, the cost of natural gas and the price of electricity are closely correlated because, based on the current resource fleet, gas-fired generation often establishes the clearing price for electricity in the NYISO’s wholesale electricity market. Part of the reason this year’s costs are garnering so much attention is because average annual wholesale energy prices in the NYISO’s market reached a record low of $25.70/MWh in 2020.

Wholesale electricity prices also rise and fall with power demand. Lower demand for electricity allows a larger proportion of electricity to be generated by more efficient and less costly facilities, resulting in lower wholesale prices. And higher demand results in higher prices. 

It is also important to note that commodity cost increases are occurring not only across the country, but around the globe. While utilities do not profit from the increased commodity prices, those costs are passed along to the consumer and are reflected in retail bills. 

How do NYISO markets respond to these prices impacts?

The NYISO’s wholesale electricity markets are designed to always seek out the least-cost solution to meet demand. The abundance of diverse generation resources (hydro, nuclear, wind, solar, fossil fuel, etc.) both here in New York State and in our neighboring regions gives the markets ample opportunity to seek out and find the lowest cost solution – even across state borders. Price signals from the NYISO’s markets have encouraged more efficient resources to enter the market, while at the same time signaling less efficient generation to exit.

What is the practical difference between the Real-Time and Day-Ahead Market and why is the pricing not the same?

The Day-Ahead Market, or DAM, is a NYISO-administered wholesale electricity market in which electricity and ancillary services are auctioned and scheduled one day prior to use.

The Real-Time Market, which settles bids every five minutes, addresses in-day changes in operating conditions relative to what was anticipated in the Day-Ahead Market. 

Roughly 90% of all energy purchased and consumed in New York State is scheduled through the Day-Ahead Market. Real-time Market prices can be more volatile because they are responding to real-time conditions (particularly outages impacting individual generators, transmission lines and/or local utilities). The wholesale energy markets are designed to limit the impact of these outage-based price impacts by scheduling the majority of energy ahead of time. Consumers are further protected because, under NYISO market rules, generators scheduled to run in the Day-Ahead Market, who are unable to run in the real-time, are responsible for purchasing replacement power at Real-Time Market prices. These rules provide a strong incentive for generators to perform as scheduled.

Who pays for the NYISO’s operating expenses, does the cost get passed onto household consumers?

The NYISO’s expenses are assessed through a surcharge paid by participants in New York’s wholesale electricity markets. The NYISO’s operating costs account for just a tiny fraction of consumers’ monthly electric bills. The NYISO does not benefit from the outcomes of its competitive markets. Importantly, the NYISO and its employees are completely independent from all market participants, bound by a strict federally-enforced code of conduct, and in no way benefit from market outcomes. 

My bill lists both supply and delivery costs, why is that?

“Supply” charges in a typical retail electric consumer bill reflect procurement costs that vary by utility, and are influenced by the wholesale cost of producing electricity. Household electricity bills also include transmission, distribution, and other charges approved by New York State. These charges are typically listed under “delivery” charges and are paid to your local electric company to fund the operation and maintenance of the distribution system, and other costs associated with state-level energy policy and clean energy subsidies.

What can I do in response to these price impacts and lower my bill?

There are simple steps all consumers can take to help reduce their energy usage, especially during periods of high pricing. These include: lowering your thermostat by a few degrees, ensuring your home is properly insulated, and using energy efficient appliances. Additionally, your local utility has likely already sent you information on how to apply for HEAP (run by New York State) or LIHEAP (federally-run) assistance. Both programs are designed to help eligible low-income individuals and families lower their utility bills. More information on the state program and eligibility rules is available here. Information on the federal program is available here.


To learn about our expectations for this winter, please view our winter preparedness press release and accompanying media briefing
 

We are an independent, not-for-profit corporation responsible for operating the state’s bulk electricity grid, administering New York’s competitive wholesale electricity markets, conducting comprehensive long-term planning for the state’s electric power system, and advancing the technological infrastructure of the electric system serving the Empire State.

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