Understand Your Utility Bill: How Electricity Costs Reflect a Changing Grid

Reading your monthly electricity bill can be confusing, and many of us simply pay it without a second glance. However, your bill provides more insight than you might think, especially when it comes to regional energy policies and changes in the energy system. This post breaks down the main charges on an average residential and commercial electricity bill, what they mean, and how they relate to policy shifts in New England. 

Understanding Your Electricity Bill

A typical electricity bill contains several different cost components. Figure 1 displays a sample electricity bill for a National Grid commercial customer in Massachusetts. While your utility bill may vary based on your local utility and where you live, many of the charges are similarly named and refer to the same fees and charges. A typical electricity bill has two main components: the supply charge and the delivery charge. The supply charge covers the cost of generating electricity, while the delivery charge is the charge to get that electricity to your home or business. On average, the delivery charge makes up about 55% of a residential bill, with the remaining 45% covering supply costs.^[1] Together, these two components make up a customer’s monthly electricity bill.

Figure 1: Sample Residential National Grid Bill

How the Grid Works

The U.S. electric grid is a massive and complex interconnected system, Figure 2 illustrates the basic breakdown of the power grid with generation on the left, representing the supply charge, and transmission and distribution connecting the customer on the right representing the delivery charges.^[2] Customers pay to support the entire system, and as the grid changes, customers will be asked to continue to invest in the grid.

Supply Services

Supply service charges consist of the cost of purchasing electricity from the wholesale market.  Like most commodities, energy is first produced in bulk and sold in a wholesale market before it is resold to customers in a retail market. A wholesale electric power market is distinct from the retail market in that there are many buyers and sellers of electricity in the wholesale market that retail customers would not typically interact with, like the owners of power plants. 

States in New England are part of an organized regional wholesale market for electricity, Independent System Operator-New England, or ISO-NE. Electricity prices are set through competitive auctions run by ISO-NE on a day-ahead and hourly basis to respond to near-instantaneous supply and demand fluctuations. However, you won’t see wholesale energy prices changing daily on your bill because the wholesale electricity market acts as a shield against short-term price fluctuations of energy commodities like oil and natural gas caused by changes in supply and demand.  Your supply service rate can only change twice a year, in January and July after the utility has gotten permission from state regulators. All supply costs are reflected in an electricity bill in cents per kilowatt hour (kWh), with bills increasing as usage increases. On your bill, you’ll see this as a “basic service” or “default service” charge. Not all customers take the basic service charge; many choose their own competitive supplier in which case their bill may look slightly different.^[3] Figure 3 and Figure 4 show the supply services charge for a residential and small commercial customer in Massachusetts. The cost per kWh is about 22% higher for a residential customer than a small commercial customer and even lower for a large industrial customer. Utilities must treat all customers in the same customer class alike meaning that they can’t offer one similarly situated customer a lower rate than another, but state regulators recognize and allow for utilities to charge commercial customers less per kWh than residential customers because they use more electricity.

Components of the Wholesale Market

The amount you are charged for supply services may vary over time, based on an array of other factors such as fuel costs, increased demand, winter-cold snaps, or other unforeseen volatility in the wholesale electricity market. The wholesale price of electricity includes three key markets: the Energy Market, Capacity Market, and Ancillary Services Market (see Figure 5). We discuss each below.

Energy Market

The first and largest component of wholesale electricity prices is the energy market. This represents, among other costs, the costs that generators incur to purchase fuel and generate electricity. On average, in 2023, about 70% of the wholesale cost of electricity was for procuring fuel in the energy market.^[5] Because New England still relies largely on natural gas fuel to produce electricity, the cost of natural gas is the number one factor influencing wholesale electricity prices.

This market is not static; supply and demand constantly change in real time, causing electricity prices to rise and fall. The price of electricity in the wholesale market can have slight differences across New England. This is due to several factors, such as fuel price differences, the location of generating resources, differences in demand, and bottlenecks within the grid where the flow of electricity is impeded due to physical constraints of power lines, outdated infrastructure, or regulatory restrictions. All of this is captured in the energy market by a pricing metric called Locational Marginal Pricing (LMP), which establishes the price for electricity purchases and sales at specific regional locations. LMPs reflect the cost of electricity at each location at any given time and include an energy component, line losses, and congestion.^[6] Interested readers can find real-time and day-ahead wholesale prices, along with congestion price data and LMPs on the ISO’s website.

Line losses happen when some electric energy is lost during transmission, requiring additional generation to meet demand. Congestion occurs when transmission lines can’t transfer all the power a location needs at that moment given physical constraints on the lines. Line losses and congestion can prevent the lowest cost generation resource from meeting demand in various regions and require the dispatch of higher‐cost resources. This drives up the price of wholesale electricity and can increase the supply component of a customer’s bill. Building transmission lines can alleviate congestion issues, but this can come at a significant cost to customers.

The Capacity Market

Capacity markets ensure the power system maintains resource adequacy or has enough generating resources to meet existing and future peak demand for electricity. Think of this as the local mall needing to build a parking lot big enough for the busiest shopping day of the holidays, not just an average day.

In the capacity market, the market must procure a set of resources that meet the total resource adequacy needs of the region and compensate resources for their capacity contribution, even when they’re not generating electricity. This ensures there will be enough generation ready and willing to run when needed. The cost to compensate resources for being ready to meet demand is reflected in the wholesale capacity price and the eventual retail price customers pay for supply, so you won’t see a capacity charge on your bill. On average, in 2023, about 25% of the wholesale cost was to procure capacity.^[7]

Currently, the capacity market pays for resources to be available to meet the projected demand for electricity three years in advance. ISO-NE is exploring reforms to the existing capacity market that could benefit customers by reducing how much idle capacity we pay for, ensuring that we only pay for what the region needs when we need it. ISO-NE reforms include changing how a resource’s capacity value is calculated and more accurately reflecting the seasonal benefit of a resource to the region.This would decrease wholesale electricity prices and lower the basic service charge that residential and commercial customers see on their bills. According to an independent analysis, reforms could reduce total regional capacity prices by up 17%, depending on how the reforms are finalized.^[8]

The Ancillary Market

Finally, the Ancillary Services Market ensures the very short-term reliability of the grid. These charges are small and represent about 5% of a customer’s basic service charge but are critical to maintaining a grid that can keep the lights on at all hours and times of year, by ensuring that fast acting resources can respond to rapid changes in supply or demand.

Delivery Services

Delivery charges include the cost of wires and poles that bring electricity to your home or business, metering, billing, customer service, and other costs associated with state-level electricity restructuring and public policy initiatives, such as renewable and energy efficiency funding.^[9]  In exchange for properly maintaining the distribution system, a state commission will also allow the distribution utility to recover its costs and earn a return on its investment. Utilities do not profit from electricity consumption but instead earn a profit in the recovery of costs for investing in its grid infrastructure. A utility’s revenue requirement and allowed return on investment is periodically determined through utility rate proceedings before a public utilities commission. The charges are paid to your local electric distribution company (National Grid, in this example) to fund the operation and maintenance of the transmission and distribution system. Figure 6 shows the delivery charge for a small commercial customer in National Grid’s service territory.

Customer Charge

The first charge is a customer charge. This is a flat monthly fee that the utility charges the customer to be connected to the grid. This cost covers the cost of the meter, meter reading, customer service, and billing.^[10]

Distribution Charge (Dist Chg)

Next is a distribution charge, or the cost of delivering electricity to the customer from the utility’s distribution system. Distribution charges pay for the cost of smaller power lines and transformers and the employees who maintain these lines.

Transition Charge

A transition charge is a fee a utility pays to its wholesale power supplier for breaking its fixed-rate contract agreement. When a utility enters a contract with a supplier, its customers agree to pre-purchase energy at a fixed rate. If customers switch to a different supplier when still under a contract, they will be charged a transition fee.

Transmission Charge

After a transition charge is a transmission charge, or the cost to deliver electricity from the generation side to the beginning of the distribution system via transmission lines. The Federal Energy Regulatory Commission (FERC) regulates these charges and approves transmission rates, which can increase if new lines are built.^[11] New England uses postage stamp rates for transmission, meaning that regardless of how far the energy flows, the same rate is charged to move the electricity across the transmission system. ISO-NE refers to these charges as Regional Network Service (RNS) charges. These charges are spread out over the six New England states’ customers based on the peak monthly demand for each load zone.

Higher transmission investments and a decline in load will affect customer costs through RNS rate increases. Lower load increases prices because the same transmission revenue requirement must be recovered with fewer sales. Starting in 2025, customers in the region will likely see their transmission charges increase as transmission owners increased their RNS charges for all customers in the region.^[12] Transmission owners attribute this jump to lower regional demand after a milder-than-expected year, increased investment in the regional grid, and the need to recover already-invested costs. Another cost represented in a customer’s transmission charge is the cost of upgrading and maintaining the existing transmission grid. These are called asset condition project costs and are rolled into RNS charges. They represent the cost of maintaining the poles, wires, and transformers on the grid. Increasing asset condition transmission charges are ultimately borne by residential, commercial, and industrial customers.

Energy Efficiency Charge

Next, there is an energy efficiency charge or the cost to support state-mandated programs offered by your local utility company. It’s typically cheaper for the utility to reduce how much electricity their customers use rather than build new generation and lines to service increased demand. States such as Massachusetts encourage utilities to fund energy efficiency programs through MassSave, which provides loans, grants, and subsidies for energy-efficient technologies like LED lightbulbs, refrigerators, and industrial equipment. All customers pay for this on their electricity bills. This benefits the individual customers who use less overall electricity and the region overall by keeping electricity demand down, thereby avoiding the need to pay for additional energy and capacity resources.

Renewable Energy Charge

Next, you’ll see a renewable energy charge or the cost to meet state-mandated renewable portfolio standards (RPS) that require a certain percentage of electricity sold by utilities to come from renewable resources. The Renewable Energy Certificates (REC) market is a compliance market in which a utility can purchase or sell renewable energy credits to ensure that, on an annual basis, they are meeting the state’s minimum RPS goal. A REC charge on a customer’s bill supports these efforts by allowing the utility to charge the customer for any additional cost of renewable energy above the price of fossil energy they procure through the REC market. Recently, ISO-NE approved modifications to the REC market to accommodate a voluntary hourly REC market.^[13] Voluntary markets differ from compliance markets because they are motivated by voluntary initiatives to support clean energy rather than being driven by regulatory compliance requirements. The hourly REC is different from monthly RECs because they provide a certificate for those hours in which the resource is generating electricity, providing more granularity into the market. The voluntary hourly REC market could increase your bill’s renewable energy charge component if more RECs enter the voluntary market. However, price caps limit the amount this already small charge can increase.^[14]This small charge represents only a fraction of customers’ energy bills, but it has garnered significant media attention due to the recent spike in electricity prices. Over time, this charge will support states’ transition to renewable energy, bringing substantial benefits to ratepayers, such as lowering supply and delivery costs, increasing energy independence, and reducing the grid’s reliance on natural gas— a major driver of price spikes and volatility. ^[15]

Distributed Solar and Electric Vehicle Charge

Lastly, the distributed solar and electric vehicle charges are state-approved charges to assist the region with the clean energy transition and provide grants to certain qualified customers to support distributed solar and EV charging infrastructure. Like the Renewable Energy Charge, this added cost will reduce the region’s reliance on volatile fossil fuels, ultimately leading to more stable and inexpensive energy costs over time.

Conclusion

New England’s electricity system is transforming. These reforms may reduce customer costs as more efficient markets and cheaper resources are developed. While these changes bring benefits like cleaner air and economic development, they also have associated costs. With ongoing policy changes, it’s important for utilities and policymakers to keep customers informed about how these shifts impact their monthly bills. Transparent communication helps customers understand where their money is going and how it supports a more resilient and sustainable energy grid.

Learn More

To learn more about reading and understanding your electric bill, visit resources like Mass.gov or whatsinmyelectricbill.com.

References

1. Hayes, Loie. 2017. “What Does Your Electric Bill Tell You about Where the Money Goes?” Greenenergyconsumers.org. Green Energy Consumers Alliance. July 16, 2017. https://blog.greenenergyconsumers.org/blog/electric-bill-deconstructed. ↩︎
2. “Electricity Explained How Electricity Is Delivered to Consumers.” “U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” n.d. Www.eia.gov. https://www.eia.gov/energyexplained/electricity/delivery-to-consumers.php. ↩︎
3. “Choosing Your Supplier | National Grid.” 2024. Nationalgridus.com. National Grid. 2024. https://www.nationalgridus.com/MA-Home/Energy-Choice/Choosing-Your-Supplier. ↩︎
4. ISO New England. 2023. “Administer the Markets.” Iso-Ne.com. 2023. https://www.iso-ne.com/about/what-we-do/administer-the-markets. ↩︎
5. ISO-NE, Energy, Load, and Demand Report, 2023 Wholesale Load Cost Data Series. https://www.iso-ne.com/static-assets/documents/2023/02/lcm_jan2023_13feb23.csv. ↩︎
6. “FAQs: Locational Marginal Pricing.” n.d. Www.iso-Ne.com. https://www.iso-ne.com/participate/support/faq/lmp. ↩︎
7. ISO-NE, Energy, Load, and Demand Report, 2023 Wholesale Load Cost Data Series. https://www.iso-ne.com/static-assets/documents/2023/02/lcm_jan2023_13feb23.csv. ↩︎
8. Schatzki, Todd, Phillip Cavicchi, and Ross. 2024. “Capacity Market Alternatives for a Decarbonized Grid: Prompt and Seasonal Markets.” https://www.iso-ne.com/static-assets/documents/100007/a08b_mc_2024_01_09_11_agi_updated_report.pdf. ↩︎
9. ISO New England. 2023. “Wholesale vs. Retail Electricity Costs.” Iso-Ne.com. 2023. https://www.iso-ne.com/about/what-we-do/wholesale-vs-retail-electricity-costs. ↩︎
10. “Basic Bill | National Grid.” 2018. Nationalgridus.com. National Grid. 2018. https://www.nationalgridus.com/MA-Home/Help-Read-Your-Bill/Basic-Bill. ↩︎
11. “Understanding Your Utility Bill | Mass.gov.” n.d. Www.mass.gov. https://www.mass.gov/info-details/understanding-your-utility-bill. ↩︎
12. RNS Rate Effective January 1, 2025, (Aug. 13, 2024), Slide 6. https://www.iso-ne.com/static-assets/documents/100014/a05.1_2024_08_1314_tc_rns_rates_presentation.pdf. ↩︎
13. ISO New England. 2023. “Generation Information System.” Iso-Ne.com. 2023. https://www.iso-ne.com/markets-operations/settlements/gis. ↩︎
14. “Basic Bill | National Grid.” 2018. Nationalgridus.com. National Grid. 2018. https://www.nationalgridus.com/MA-Home/Help-Read-Your-Bill/Basic-Bill. ↩︎
15. Shemkus, Sarah. 2025. “Solar is not the culprit for Maine’s high utility bills, despite claims” Canarymedia.com. Canary Media. March 4, 2025. https://www.canarymedia.com/articles/solar/solar-is-not-the-culprit-for-maines-high-utility-bills-despite-claims. ↩︎