Most electricity users that entered into contracts before September 2015 will see an increase up to half a penny per kilowatt-hour (kWh) on their July bill. That can mean tens of thousands of dollars in additional charges to large users and have significant impact on any operating budget.
“Every million kilowatt hours will cost around $4,000 more, even with a fixed contract in place,” says Karl Shaw, COO at TPI Efficiency Consulting. “Manufacturers and large commercial building owners will certainly feel the effects.”
While there’s nothing that can be done to avoid the new charges, there are steps that can be taken to mitigate the fallout.
Smart Business spoke with Shaw about the reason for increased charges and what users can do to soften the financial blow.
What prompted the change that’s impacting electricity costs?
The 2014 polar vortex taxed PJM, the regional transmission organization that’s part of the Eastern Interconnection grid, creating a record peak in demand. More than 40,000 megawatt-hours (MWh) of the fleet’s 180,000 MWh were not delivered because of the freezing conditions. That led to numerous generation failures and operational issues that left more than 20 percent of the region without power for a period of time.
To enhance operational performance and ensure the availability of generation resources, PJM drafted the Capacity Performance Proposal that was approved by the Federal Energy Regulatory Commission (FERC) in June 2015. This arrangement included an Incremental Transition Auction, providing larger payments to generators that commit to having power available when demand is highest.
How does this change affect energy users?
Retail energy providers view FERC’s action as a ‘change in law’ event, meaning they can pass the previously unknown cost to the end user even if the contract includes a fixed rate.
Exactly how much the price will increase is based on the company’s peak load contribution (PLC) tags and load factor. Capacity accounts for 25 to 35 percent of a customer’s contract energy costs on average. Results of the Incremental Transition Auction indicate that customers will see an average increase of 15 percent to overall electric supply charges from June 2016 to May 2017. Customers that have contracts with fixed capacity during this period will see a rate increase of around $0.004/kWh and an estimated $0.0023/kWh from June 2017 to May 2018, based on a 50 percent load factor.
What can a business owner do to mitigate this additional cost?
Returning to the local electric utilities’ generation/supply service is not a viable strategy to avoid the increase because utilities in PJM are subject to collecting the same capacity costs as retail electric providers. There are, however, a few ways business owners can limit the cost impact.
Energy users that undertake efficiency projects — for example, those that install LED lighting and controls, HVAC improvements or energy management and information systems — benefit from reduced usage and lowered PLC tags.
Another option is to work with an energy consultant. Consultants keep their eyes on the market for this kind of change and make clients aware of forthcoming charges well ahead of when they’ll appear on their monthly bill.
No business likes to be surprised by unexpected costs. A good energy consultant will monitor your accounts and reduce the impact of any additional expenses that may occur. In the end, it’s important that you work with someone to procure your energy that is proactive and has your best interest in mind.
Insights Energy Solutions is brought to you by TPI Efficiency Consulting