The industry’s supply chain consists of three broad categories—generation, transmission, and distribution.
Power generation requires a fuel source—for example, coal, nuclear, natural gas, or wind—and a power plant to convert the fuel source into electricity. Then the generated electricity is supplied to the transmission lines after stepping up—or increasing—the voltage. PPL Corporation (PPL) and Duke Energy (DUK) generate the maximum amount of electricity among their peers. The Utilities Select Sector SPDR (XLU) has exposure to both the companies.
Transmission involves transmitting electricity over long distances. The energy is at very high voltages. The voltages are increased because electricity can be transferred more efficiently at higher voltages. American Electric Power Company (AEP) operates more than 39,000 miles of transmission across the country. Southern Company (SO) manages 27,000 miles of transmission.
Distribution steps down—or reduces—the voltage. It delivers electricity locally to commercial and residential customers. The customers are the end users of electricity. For industrial users, the distribution costs are less because they’re supplied high voltage power.
A vertically integrated utility handles the functions, transmission, and distribution of electricity within a certain geographical area. Apart from integrated players, many utilities exist. They handle one or two of the above functions.
The cost of generation is the major component of electricity’s price. It accounts for 58% of the cost. Electricity’s transmission and distribution to end users accounts for 11% and 31% of the average prices.