Change ,

Planning For And Managing Coming Electricity Cost Increases

Mitigate the Impact to Your Organization

Significant capacity price increases become effective June 1, 2018. Capacity costs are unavoidable but steps can be taken today to help mitigate these increases to your business.

Introduction

Costs to maintain adequate power generation reserves and to ensure reliability in the ComEd service area are increasing substantially starting in June of 2018. This means that you could see substantial price increases in your next electricity supply contract. Though you may not be able to avoid this increase entirely, you can take steps today to help mitigate the impacts to your organization.

This paper will help you and your organization understand pending cost increases in reliability charges in the ComEd service area, and how you can potentially mitigate the impact of those increases.

Capacity: A basic overview

PJM Interconnection (PJM) is the Regional Transmission Organization that administers wholesale power markets and sets reliability rules for ComEd electricity customers. Reliability is accounted for as a component of your supply cost, which is called capacity.

PJM ensures year-round, reliable power supplies by securing commitments from generators to deliver energy whenever it is needed to satisfy all customer demand on the power grid. PJM accomplishes this through what’s called the Reliability Pricing Model (RPM). Regional Transmission Operators (RTOs) must plan for energy demand during peak periods such as extreme weather conditions during the winter and summer seasons, ensuring reliability at all times.

Through the Reliability Pricing Model (RPM), PJM establishes the price which Load Serving Entities (or LSEs, such as AEP Energy) must pay in order to ensure that generators are always available to meet customer demand. PJM accomplishes this by conducting auctions which match supply and demand at a set clearing price. Prices are generally set three years in advance (with minor adjustments occurring periodically thereafter) of each June 1 to May 31 period; this period is also known as a Planning Year. For instance, capacity prices for the planning year June 1, 2017 through May 31, 2018 were generally set based on an initial auction conducted in May 2014.

Recent auctions have resulted in increasing prices for reliability (capacity) in the ComEd service area (zone), as it appears some generators are either deciding not to offer reliability service, and/or they are demanding higher prices to recover costs associated with this service. The table A-1 below shows the trend in increasing capacity prices.

Table A-1

PJM Planning YearPeriodPJM Capacity Price 1 ($/kilowatt demand)
2016-20176/1/16-5/31/17$43
2017-20186/1/17-5/31/18$66
2018-20196/1/18-5/31/19$93
2019-20206/1/19-6/31/20$89
¹PJM Capacity price available

How do increasing capacity rates affect you?

Your electricity supplier incurs capacity costs, which are ultimately charged to you through your electricity supply contract, based on the rates described above and your contribution to system reliability requirements. This is known as your Peak Load Contribution (PLC), expressed in kilowatts (kW) of demand, and is determined by your electricity usage during the five highest hours of system demand in the summer months. These five hours are known as the Five Coincident Peaks (or 5CP).

Your electricity usage over just five hours determines your capacity cost, which can make up to 20-40% of your total electricity cost over the life of your energy supply contract.

Your Peak Load Contribution for a planning year (June 1 through May 31) is determined by your usage and recorded by your local utility over the five coincident peaks (5CP) of the prior summer. For instance, your PLC starting June 1, 2017 was determined by your energy consumption used during the five 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).

Now is the time to consider what steps you can take to manage your PLC in order to reduce next year’s capacity cost increase.Your Peak Load Contribution for a planning year (June 1 through May 31) is determined by your usage and recorded by your local utility over the five coincident peaks (5CP) of the prior summer. For instance, your PLC starting June 1, 2017 was determined by your energy consumption used during the five 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).

Typically peak days and hours occur during the summer months in middle to late afternoon when temperatures are at the highest point in the day. Energy demand on the grid is at its highest with cooling demand by consumers. Generators are producing mass amounts of power to meet customer demand during these peak days and hours.

For example, PJM’s Five Coincident Peak (5CP) for summer 2016 are shown below. Your PLCs for the 2017-2018 planning year were set based on your electricity usage during these five hours:

Table A-2

DateHour Ending (HE) - Eastern Prevailing Time (EPT)2
8/11/201616:00 HE EPT
7/25/201616:00 HE EPT
8/12/201616:00 HE EPT
7/27/201617:00 HE EPT
8/10/201617:00 HE EPT
²PJM 2016 5CP available

How will these increases affect your bottom line?

Let’s look at the numbers. Here we considered a manufacturing company whose Peak Load Contribution (PLC) is 1,000 kW as determined by the local utility and described above. Without taking any action, this customer could expect to incur estimated increased capacity costs of $114,000 when we compare the customer’s current capacity cost during planning year 2016-2017 over the next three years.

Table A-3

Planning YearEstimate Capacity CostEstimated Cost Adjustment
2016-2017$43,000-
2017-2018$66,000$23,000
2018-2019$93,000$27,000
2019-2020$84,000($9,000)
Total$286,000$114,000

ComEd Zonal Capacity Cost

What’s the solution?

You can’t control capacity rates, but you can potentially control the other factor that determines your capacity costs – your PLC – and therefore help to mitigate the cost increases that are likely headed your way as a result of higher capacity rates.

The biggest capacity rate increases are set to take effect starting June 1, 2018. Your electricity usage during this coming summer’s Five Coincident Peak (5CP) hours will determine how these rate increases affect you.

The key is knowing when the five coincident peak hours are most likely to occur and taking action during those times to minimize your electricity usage and impact on the grid. What’s more, you’ll want to ensure that your electricity procurement strategy allows you to capture the benefit of reducing your electricity consumption during these peak times.

AEP Energy can help you with each of these strategies.

How will I know when to manage my PLC?

AEP Energy closely monitors electricity system conditions throughout the summer so that we may alert customers when the 5CP hours are most likely to occur. We notify customers who participate in one of our Peak Load Management services the day before and the day of likely peak hours. This provides organizations with ample time and opportunity to take steps to manage electricity usage during these periods, and therefore reduce its PLC and mitigate future capacity cost increases.

AEP Energy’s Peak Load Forecasting service was 100% accurate for each of the 5CP hours.  Customers enrolled in our services, by responding to our alerts and through their efforts to reduce electricity usage during these peak periods, will be rewarded during planning year 2017-2018 with a cumulative estimated savings of over $14 million dollars.

What steps can I take to manage my capacity costs?

How you manage your capacity costs will depend greatly on how you use electricity. You will need to consider what uses of electricity are most critical during those peak hours, and which uses can be scaled back or moved to non-peak hours. Some general opportunities include turning up thermostat settings for a few hours, blocking out incoming sunlight, shifting batch operations, dimming or turning off lights where possible.

AEP Energy can help its customers identify potential capacity cost reduction opportunities.

How can I ensure my PLC management strategies pay off?

Your energy procurement strategy needs to align with your PLC management strategy for you to realize the full benefits. Choosing the wrong product, the wrong purchasing term, or the wrong purchasing timing can nullify or delay any benefits you might receive from managing your PLC.

AEP Energy will help you choose the right procurement strategy to ensure you realize the benefits of your PLC management efforts.  What’s more, we can provide analyses and reports to help you quantify how much money you’ve saved (or cost you’ve avoided) through your PLC management efforts.

Long-Term Strategy

To effectively control your electricity costs, it’s important to understand how those costs are ultimately determined, and to be aware of all of the factors that affect your costs. It’s also important to put in place a procurement strategy that takes into account all of your cost factors, regulatory and market developments, and how all of these things can impact your efforts to manage and control your costs and avoid unpleasant surprises in the future.

In Conclusion

Increases in electricity costs are likely to impact your organization. These costs are driven by increases in the rates that power generators are demanding to ensure reliability of the wholesale electric grid. Planning for these increases now and developing a strategy that will allow you to mitigate future increases by managing your electricity usage during peak grid hours is critical.

Your Peak Load Contribution (PLC), determined based on your electricity usage over the five highest demand hours on the electrical grid over the summer months (Five Coincident Peaks or 5CP), is the factor that you control when it comes to your capacity costs. To lessen the impact of significant increases in capacity rates starting in June of 2018, you will need to manage your PLC this summer. Here are a few things to keep in mind when managing your PLC and effectively manage coming electricity costs increases:

  • Be aware of when the Five Coincident Peak Hours are likely to occur.
    • AEP Energy provides Peak Day Alerts to its Peak Load Management customers.
  • Have a plan for how you can reduce your electricity usage during Peak Hours
    • AEP Energy can help you devise a Peak Load Management plan.
  • Put in place and execute a procurement plan that allows you to realize the benefits of your peak load management efforts
    • AEP Energy can help you select the right product, term, and timing options to ensure maximum benefit from your Peak Load Management efforts.

To learn more about this topic, please email protect@aepenergy.com.

 

About the Author

George Deljevic, Vice President, Commercial & Industrial Solution Sales and Development

George currently maintains primary responsibility for developing solutions strategies for AEP Energy’s commercial, industrial, and institutional customers. Previously, George was responsible for all valuation, structuring, analytics, and risk management related to all of the Company’s retail energy contracting activities, as well as market operations and sales support functions. At AEP Energy, George has also been responsible for guiding the company’s product development strategy and execution, as well as direct development and roll out of new products and services, including demand response, advanced energy analytics, and natural gas.

George has extensive experience in the retail energy industry, with management roles in pricing, structuring, portfolio management, start-up operations, and sales for DTE Energy Trading, Inc., Nordic Energy Services (Chicago), Integrys Energy Services, Premier Energy Marketing (Ann Arbor, MI), and Nordic Energy Marketing (Ann Arbor, MI).

 

About AEP Energy

AEP Energy is dedicated to improving your bottom line. We do so by understanding your business’ needs and helping you develop a customized electricity supply plan that gives you peace of mind.

AEP Energy is a subsidiary of American Electric Power Co., Inc., one of the nation’s largest electric utilities and a Fortune 200 company. AEP Co., Inc., a company whose life spans more than 100 years.

Through our company affiliate, we are able to strategically procure energy from power generating sources, including AEP Generation Resources – our parent company’s fleet of competitive power generating plants.

AEP Energy makes it easy for customers to buy, manage and use energy. A competitive supplier of power and energy management since 2002, we serve nearly 430,000 plus customers and operate in 23 utility service territories across the U.S.