Electricity on itself is fairly useless to everyday use. In almost every situation it is converted into a different form of energy such as light, heat or sound. Unlike the other energy sources such as coal, oil and gas, electricity is rarely found naturally in our world and is even harder to capture and store it. Electricity can be gained out of different sources, that is to say fossil fuels, solar and wind energy and nuclear energy. There are a number of players active on the electricity market. First are the companies who generate the electricity, second are the transporters and lastly are the suppliers who supply end users with the electricity.
As electricity cannot be stored, it must be produced when it is demanded. This results in the price of electricity being very depended on the actual delivery of electricity. Therefore problems with the delivery will cause highly volatile prices.
The possibility of supply of electricity will have an impact on the price of electricity. First of all the physical capacity of the supply network will impact the supply. Generating electricity costs a form of input. This can be solar, wind or hydro energy, which are free of charge. But it can also include coal, oil or natural gas, where the price of this input will have an effect on the price of electricity.
The level of technical quality of a generating power plant can affect the supply possibilities. This can determine how much maintenance a plant will require and how much transmission a plant is able to export. These factors will affect the supply capabilities.
On the other side of the equation, the demand for electricity will also contribute to creating a price for electricity. Similar to coal, oil and natural gas, electricity demand will increase as economic activity rises. With the economy growing in a country or area the technological advancements that come with it will create an increasing demand for electricity.
The weather plays a role in determining the demand for electricity. As electricity use will increase in summer time for powering the air-conditioning. The time of day or week will also play a role in the price of electricity. For example in the weekends or during nightly hours the demand for electricity will decline and thus the price will decline accordingly. Electricity can therefore be traded differently for weekends of seasons.
The end user of the electricity will also play a part in generating a price. Retail users will use an increased amount of electricity during evenings and weekends, because these are the hours they are home. Industrial users will mostly use electricity during workdays. Thus the different type of user will play a role in determining the demand for electricity on different times.