*90 percent of the time.
Above, Joe Dominguez, CEO of Constellation Energy, one of the US’ largest electric generators, affirms, “gas sets the price of electricity, 90 percent of the time.”
To cut thru all the bullshit from fossil fuel apologists about the price of electricity, it helps to understand a few fundamentals about how electricity is priced.
Jesse Jenkins: If I’m just a utility operating on my own, I want to basically run my fleet on what we call economic dispatch, which is rank ordering them from cheapest to most expensive on a fuel or variable cost basis, and trying to maximize my use of the less expensive generators and only turn on the more expensive generators when I need them.
That introduces this idea of a marginal generator, where the marginal generator is the last one I turned on that has some slack to move up or down as demand changes. And what that means is that if I have one more megawatt-hour of demand in that hour — or over a five-minute period, or whatever — or 1 megawatt-hour less, then I’m going to crank that one generator up or down. And so the marginal cost of that megawatt-hour of demand is the variable cost of that marginal generator. So if it’s a gas plant that can turn up or down, say it’s $40 a megawatt-hour to pay for its fuel, the cost on the margin of me turning on my lights and consuming a little bit more is that that one power plant is going to ramp its power up a little bit, or down if I turn something off.
And so the way we identify what the marginal value of supplying a little bit more electricity or consuming a little bit more electricity is the variable cost of that last generator, not the average cost of all the generators that are operating, because that’s the one that would change if I were to increase or decrease my output.
Does that make any sense?
Robinson Meyer: It does. In other words, the marginal cost for the whole system is a property of the power plant on the margin, which I realize is tautological. But basically, the marginal cost for increasing output for the entire system by 1 megawatt-hour is actually a property of the one plant that you would turn on to produce that megawatt-hour.
Jesse Jenkins: That’s right, exactly. And that can change over the course of the day. So if demand’s really high, that might be my gas plant that’s on the margin. But if demand is low, or in the middle of the day, that gas plant might be off, and the marginal generator during those periods might be the coal plant or even the nuclear plant at the bottom of the supply curve.
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.
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.
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.
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.
