Who Really Controls U.S. Electricity Prices?

AUSTIN, TEXAS – AUGUST 18: An aerial view of a power plant next to a freeway overpass on August 18, 2023 in Austin, Texas. The Electric Reliability Council of Texas (ERCOT) has asked Texans to conserve power as a prolonged heat wave continues sweeping across the state. Today marks 42 consecutive days of triple digit weather across the state. (Photo by Brandon Bell/Getty Images)

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When we see prices rise and fall at the gas pump, we generally have an idea of what is driving the changes. Generally, it’s movements in the underlying price of oil, or sometimes there are refinery issues that can impact gasoline prices even when oil prices are stable. And people generally blame the oil companies in any case.

The electricity markets are far more opaque. Electricity bills have skyrocketed in many places this summer, but the reasons you hear depend on who you ask.

Politicians blame climate mandates, utilities point to infrastructure upgrades, and analysts cite natural gas volatility. The truth is far messier and more complex than the gasoline supply chain. Prices are shaped by a chain of fuel suppliers, generators, grid operators, regulators, and investors—each adding its own costs, incentives, and risks.

In a system built to be competitive and transparent, the big question is: who really controls U.S. electricity prices?

The Multi-Layered Pricing Machine

The truth is that electricity prices aren’t set by a single authority. They’re the outcome of a chain of events where costs move through several hands before reaching your monthly bill.

Fuel Providers – The Invisible Hand

Natural gas, coal, uranium, and renewables set the baseline cost for generation. When gas prices spike—because of weather, geopolitics, or export demand—power prices usually follow. Even in renewables-heavy regions, gas often sets the marginal price that clears the market.

Power Generators – The Bidmakers

Independent power producers (IPPs) and utility-owned plants bid into wholesale markets. Their bids factor in fuel, maintenance, and desired return. In competitive regions, generators live or die by market pricing. However, that has been a very lucrative market for many competitive producers in recent years. In regulated states, cost-plus pricing still shields many plants from direct market swings.

Grid Operators – The Market Architects

Regional transmission organizations (RTOs) like PJM, ERCOT, and CAISO run day-ahead and real-time markets. They dispatch the lowest-cost power first, manage congestion, and maintain reliability. Their locational marginal pricing algorithms can make prices jump dramatically when demand peaks or transmission lines are constrained.

Utilities – The Delivery Layer

Utilities buy power at wholesale and deliver it to homes and businesses. In regulated states, they recover costs through rate cases filed with state commissions. In deregulated markets, they act more like brokers, passing through market prices with limited markup.

Regulators – The Gatekeepers

State public utility commissions approve rates, capital recovery plans, and allowable returns. They can slow down hikes but rarely block them outright if tied to fuel or infrastructure costs. At the federal level, the Federal Energy Regulatory Commission (FERC) oversees interstate transmission and wholesale rules.

Investors – The Hidden Influencers

Shareholders expect steady dividends and predictable returns. Their pressure shapes capital allocation, rate design, and project choices—often tilting utilities toward capital-intensive projects that guarantee recovery, even when cheaper solutions exist.

Why Prices Swing

Electricity prices are notorious for volatility, and the drivers go well beyond seasonal demand.

Fuel Costs

Natural gas still sets the marginal price in most U.S. markets. A cold snap in New England or a Texas heat wave can send prices skyrocketing within hours.

Weather

Climate extremes now push the grid to its limits more often. In markets like ERCOT, scarcity pricing mechanisms can trigger massive spikes even during short supply shortages.

Infrastructure Bottlenecks

Transmission congestion and limited interregional connectivity isolate some markets. Congestion pricing can push local prices higher even when generation is plentiful elsewhere.

Policy Design

Capacity markets, carbon pricing, and renewable mandates all affect how generators bid and how utilities recover costs. Policies intended to accelerate decarbonization can raise near-term costs before long-term savings materialize.

Market Structure

Vertically integrated utilities offer more stable prices but lack competition. Retail choice markets deliver competition—but they also expose consumers to wholesale swings, often without effective hedging tools.

Together, these factors create a pricing system that is reactive, fragmented, and hard to predict. For investors, understanding these drivers is crucial—not just for picking utility stocks but for anticipating regulatory and infrastructure shifts.

Case Studies in Price Formation

Electricity markets reveal their true character under stress. These three regions show how market design and fuel dependency create very different outcomes.

Texas (ERCOT): Scarcity Pricing Meets Deregulation.

Winter Storm Uri in 2021 exposed ERCOT’s vulnerabilities. With minimal interconnections to other states and no capacity market, ERCOT relied on scarcity pricing to keep generation online. Wholesale prices spiked to $9,000/MWh, bankrupting dozens of retail providers and leaving consumers with retroactive charges. Investors in flexible generation assets reaped windfall profits. Lawmakers have since proposed reforms, but the fundamental trade-off between market freedom and reliability remains.

California (CAISO): Renewables, Wildfires, and Risk Premiums.

California’s aggressive renewable buildout creates unique pricing dynamics. Midday solar surpluses often push wholesale prices negative, only for prices to jump during the evening ramp. Add wildfire liabilities—PG&E’s 2019 bankruptcy is the prime example—and the result is some of the highest retail rates in the nation. Demand-response programs and time-of-use rates aim to smooth peaks, but volatility persists. Investors see innovation upside here but must accept higher regulatory and climate risk.

New England (ISO-NE): Pipeline Constraints and Winter Spikes.

Despite progressive energy policies, New England remains highly dependent on natural gas in winter. Limited pipeline capacity forces the region to import LNG at global prices, which can spike during cold snaps. ISO-NE’s capacity market offers some buffer, but price shocks still happen. In January 2022, wholesale prices briefly topped $200/MWh despite adequate generation—showing that fuel logistics, not generation capacity, can be the binding constraint.

Winners and Losers

Electricity pricing is not just about cost recovery; it’s a transfer of value between stakeholders.

Utilities often come out ahead. In regulated states, they earn guaranteed returns on capital projects—whether that’s transmission upgrades, grid hardening, or smart meters. In deregulated markets, they still collect delivery fees and benefit from infrastructure ownership.

Independent power producers can profit handsomely from volatility. Gas peakers, flexible generation, and increasingly battery storage assets capture premium prices when supply tightens.

Infrastructure investors—including pension funds and private equity—quietly collect rent from transmission lines, substations, and renewable portfolios. Their returns are often inflation-linked, paid for by ratepayers who may not realize where their money goes.

Consumers, meanwhile, bear the brunt of volatility. Households have little ability to hedge demand, leaving them vulnerable to fuel and policy shocks. Large industrials fare better, using on-site generation, demand response, and long-term contracts to manage exposure.

Policymakers must balance affordability, reliability, and decarbonization. When reforms backfire or infrastructure lags, they pay a political price.

In short, electricity pricing is less about electrons and more about allocation. Investors who position around rate-recoverable assets and volatility-friendly generation stand to gain. For everyone else, the forces setting prices are largely invisible—and often misaligned with household budgets.

The Illusion of Control

It’s tempting to think electricity prices are simply the product of supply and demand, but the reality is far more choreographed. From fuel markets to regulators, the system is layered and opaque. Consumers think they are paying for power; in reality, they are funding infrastructure projects, policy goals, and investor returns.

For investors, the lesson is clear: the winners are those who understand the choreography—who spot assets with guaranteed cost recovery, anticipate regulatory pivots, and hedge against volatility. For everyone else, the price of power is a moving target.

Electricity prices aren’t dictated. They’re negotiated. And there are lots of parties at the table.