Change ,
Back to Customer Insights

Demand Cost Management

May 17, 2017

April 2017 Edition: Demand Cost Management – Did you know that demand-based cost components make up 20 to 40% of your total electricity cost? AEP Energy Customer Insights explores demand-based costs to help you make smart energy supply purchasing decisions.


Market Overview

Provided by AEP Energy Trading and Managing Director of Energy Solutions


Natural Gas

  • Following the sell-off in February due to exceedingly warm temperatures, natural gas and power staged a rebound during the month of March thanks to more seasonal temperatures on average.
  • The bigger gains were seen in the front of the curve, as prompt month (April 2017) natural gas gapped up $0.416/MMBtu to $3.190/MMBtu.
  • Balance of the year, May through December 2017 also gained some increase, closing up $0.280/MMBtu to $3.325/MMBtu.
  • In the calendar years, 2018 was up $0.102/MMBtu to $3.031/MMBtu, while 2019 was almost unchanged at $2.832/MMBtu.

Power: PJM – Ohio

  • Power followed natural gas with higher trends as April 2017 AEP – Dayton Hub On-peak power increased by $2.50/MWh to $34.50/MWh.
  • Balance of the year, May – December 2017 increased by $1.90/MWh to $37.02/MWh.
  • Further out into the curve, calendar 2018 was up $0.45/MWh closing at $35.92/MWh while 2019 actually decreased by $0.22/MWh down to $33.66/MWh.

Power: Illinois

  • MISO’s fifth annual Planning Resource Adequacy (Capacity) auction for planning year 2017/18, effective June 1, cleared at $1.50/MW-Day in Zone 4 (Illinois) as did MISO’s entire region.
  • MISO capacity price decreased from 2016/17 planning year of $72.00/MW-Day in Zone 4 to $1.50/MW-Day mostly due to a significantly lower load forecast in MISO north and central regions. MISO’s total load forecast for 2017/18 planning year is roughly 135,000 MWs.
  • While future auction parameters are still unknown, it is likely that MISO will keep a similar lower or adjusted forecast. In general, load forecasts have come down in many regions as energy-use-offsets like energy efficiency, demand response and the lack of industrial demand have changed outlook.
  • 2017/18 auction results should put pressure on forward capacity prices for the next few years, but the timing of the declines can be very tricky in an illiquid market controlled by a few major sellers.
  • MISO Illinois capacity sellers are trying to keep their capacity offers as high as possible following the auction to hold onto value (closer to the $72 MW-Day despite it falling significantly in the most recent auction). This is creating a problem for commercial and industrial end users looking to fix their capacity cost when a limited amount of sellers aren’t willing to readjust capacity, at least initially. It is advisable for C&I energy users to have their suppliers pass-through MISO capacity until prices more fairly take into account the last auction clearing prices ($1.50 MW-Day).

Power ERCOT – Texas

  • Summer on peak prices moved up with natural gas as 2017 On-peak power closed up $2.83/MWh to $53.27/MWh.
  • Calendar 2018 closed up at the close of March as well by $0.58/MWh to $52.96/MWh.

Demand Cost Management Two business people shaking hands during a meeting in the boardroom.

Did you know that demand-based cost components make up twenty to forty percent of your total electricity cost? When consumers focus on finding the best product solution for their energy needs, demand-based cost components are often overlooked. Capacity and transmission are demand-based cost components which will be explained in more detail throughout this article.

AEP Energy’s main objective is to help customers make smart decisions regarding their energy supply purchasing. We do so by introducing strategies, which in some cases are specific to your organization, thus reducing dollars spent on demand-based costs. AEP Energy also offers customers an opportunity to earn incremental revenue through other demand (load) management products. These products are designed to help the energy grid in times of heavy demand, such as hot summer days when cooling demand is high. For participating in this service, you are rewarded financially.

Through this dual strategy of “Reduce” and “Earn”, AEP Energy is uniquely positioned to be a true partner with you. This all starts with sound science of “Data Analytics”.

Data Analytics

To help customers make the right buying decisions, and by offering them the appropriate demand (load) management product, AEP Energy analyzes your historical usage data  by identifying behavior and patterns. Based on data analytics, demand (load) management opportunities are identified, recommended for you, and executable actions are implemented. These data-driven decisions ensure that customers are presented with solutions that deliver maximum value with minimum change in your operations.

Load Management Products: Help Businesses Control Energy Costs

Peak Load Contribution (PLC) Management Service  

As mentioned above, one demand-based cost component is capacity. Reliability is accounted for as a component of your supply cost, which is called capacity. PJM Interconnection (PJM) is the Regional Transmission Organization (RTO) who is responsible for insuring reliability and cost associated with capacity. Although consumers cannot control capacity rates, you do have some control over your PLC.

A customer’s annual demand obligation for capacity is based on your individual Peak Load Contribution (PLC). Your PLC for a planning year (June 1 through May 31) is determined by your local utility. Your local utility takes your organization’s average demand level during the fi e highest demand hours (called Coincident Peak or CP hours) for the entire PJM system during the summer months. For instance, your PLC starting June 1, 2017 was determined by your energy consumption used during the fi e highest hours of system demand last summer. Your June 1, 2018 PLC will be determined by your 5CP electricity usage this summer (June through September 2017).

AEP Energy provides a product and complimentary service to customers to help manage and reduce their capacity costs. With our Capacity Pass-Through Product, AEP Energy will forecast the probable PJM CP days and hours, and then issue day-ahead alerts to customers, who choose to take appropriate action to curtail load. By taking action and successfully curtailing your load when alerts are issued, you will likely reduce your PLC for the next planning year, thus ultimately decreasing your overall capacity costs, and in  some cases, significantly. Following the PLC setting season, AEP Energy generates a personalized cost reduction report for each customer showing your performance compared to your projected baseline. The report also displays your overall projected cost decrease for the next planning year as a result of your actions. This is a value-added service provided to customers with absolutely no financial benefit to AEP Energy. Last year AEP Energy customers participating in the Peak Load Contribution (PLC) Management Service realized over $15 million in capacity cost reductions.

Network Service Peak Load Management Service

Transmission is the second demand-based cost component. Transmission is the cost associated with the movement (or transfer) of electric energy throughout the energy grid (also known as the transmission network).

A customer’s annual demand obligation for transmission is based on your individual Network Service Peak Load or NSPL. Transmission costs differ by your local utility and are set depending on the methodology adopted by each transmission zone. Your transmission NSPL becomes effective each calendar year starting January 1 and ending December 31. The NSPL could be a measure of your demand level from one to five CP hours for that particular zone and are determined either over a period of few months to an entire year. For example, it is possible for a customer to be responsible for the entire year’s transmission charges based on an NSPL set during a single hour in winter. For customers who elect a “Transmission Pass-Through Product”, AEP Energy will monitor for such zonal peaks and in applicable utility zones and issue alerts to customers who may choose to take appropriate action to curtail load. Customers participating in Network Service Peak Load (NSPL) Management Service and successfully curtailing load (NSPL) will likely reduce transmission costs based demand charges during the following calendar year.

Load Management Products: Help Customers Earn Money

Demand Response

As defined by PJM, “Demand Response is a voluntary PJM program that compensates end-use (retail) customers for reducing their electricity use (load), when requested by PJM, during periods of high power prices or when the reliability of the grid is threatened”.  As a “Curtailment Service Provider” in PJM, AEP Energy can offer its customers financial incentives for participating in this program, where businesses can earn significant dollars per megawatt of load curtailed. The program starts with the customer indicating their interest in participating.

Through data analytics, AEP Energy will help your organization with your curtailment strategy, including  the amount of load that you can curtail. Once the right amount has been nominated, AEP Energy will enroll your organization with PJM. Your obligation is to respond in case of an “Emergency Event” by shedding the pre- decided load (energy usage). Should PJM not call for a curtailment event, the customer demonstrates capability by participating in a one-hour “Test Event”. Customers are eligible for the payment as though an actual event took place, provided you curtail load as contracted. To date, AEP Energy has paid participating customers meeting their obligation over a million dollars through this program.

PowerPerksSM

AEP Energy offers an alternative service called PowerPerksSM to PJM’s Annual Demand Response Program for those who may be reluctant to commit to obligatory load curtailment. PowerPerksSM offers customers the flexibility and control over your participation. Similar to PJM’s Demand Response Program, customers are alerted when PJM forecasts the energy grid is facing high demand. Customers may choose to participate by curtailing load, and by doing so, you are compensated at a minimum rate of $500 per megawatt-hour. Participation is completely voluntary, and you can choose your level of curtailment. The program runs from June through September each year. At the end of the season, AEP Energy will measure each customer’s compliance and will compensate the customer accordingly. There is no need for any specialized equipment to be installed, nor is there a cost to participate or a penalty for under performance. The only requirement is a willingness to receive alerts. PowerPerksSM is easiest and the least risky service for customers to “earn” money for demand management.

Let AEP Energy Help You Take Action Now

AEP Energy is a true partner for any customer who wishes to manage their demand-based charges. Through deep understanding of your usage profile and behavior patterns, AEP Energy can help recommend products and solutions that will help you reduce your demand-based charges or earn money to offset demand-based costs. Now is the time to consider what steps you can take to manage your PLC and NSPL in order to reduce next year’s capacity and transmission costs.


Any references made to prompt month natural gas will normally be associated with a range starting the first day of the month through the final settlement of the respective prompt month natural gas contract. Other references to forward natural gas prices and all power prices will be based on a range starting the first day of the month through the final day of the month.

This report made by AEP Energy contains projections and future expectations that are based on reasonable assumptions, but any such statements may be influenced by innumerable factors that could cause actual outcomes and results to be materially different from those anticipated, including (without limitation) changes in utility regulation and the allocation of costs within regional transmission organizations, including ERCOT, PJM, MISO and SPP.

1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)
Loading...