The recent series of headlines has largely focused on the part of companies that supply energy to consumers. However, some of the energy companies make most of their money by generating and selling energy in bulk. Market regulator Ofgem estimates that, while supply gains are around 5 percent, generation gains may reach 30 percent. Regulated public services can earn a certain rate of return on their capital investment, as defined in their income requirements.
However, the utility company ultimately earns money by charging consumers for their electricity. Some energy companies make money through the transmission and distribution of energy. Transmission channels transfer electricity over long routes, such as across the country, while distribution networks bring electricity from the larger transmission grid to your company. There are two main models for how electricity companies make money: regulated returns and competitive bids.
Regulated returns involve state electricity company rates set by respective state electricity regulatory commissions. These rates are set in such a way that the electricity company recovers all costs and also obtains a specific return on sales, subject to meeting certain performance criteria. Competitive bids involve buyers and suppliers (including generation and distribution companies) trading on energy exchanges to meet short-term supply and demand requirements. In addition to these two models, companies also sell energy in the commercial market. Nuclear power plants have the best track record of reliable power supply and are less polluting, but they are expensive to build and take years to move from conception to operation.
Small-scale producers generate electricity at lower levels that are connected to local distribution channels. Based on an estimate of each of these costs, a fee is established for each power company plant for a specific period. This means that different companies are likely to have different reasons for raising household energy bills. For example, the price increase in the wholesale market will not affect the Big Six because of their energy generation and supply. Utility companies make a profit by investing in capital expenditures, such as new power plants, transmission and distribution infrastructure, and by recovering those costs through tariffs, plus an approved rate of return on investment. In conclusion, power generation companies make money through regulated returns, competitive bids, and commercial markets.
They also make money through transmission and distribution of energy, as well as through capital investments in new power plants and infrastructure.