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Non-Commodity Electricity Costs Continue to Rise

           US - Energy News
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Since the financial crisis started in 2008, electricity prices in both the PJM/ComEd area as well as nationally have been declining.

The average day-ahead price in 2008 in the ComEd/PJM area was $50.50 per MWh versus an average day-ahead price of $26.47 per MWh in 2016, a decline of 47.58%. While that is an extreme example, ever since the end of 2013, the 12, 24, and 36-month forward prices have fallen 3.75%, 7.90%, and 6.88%, respectively. Unfortunately, our customers’ bills have not declined by the same amounts. This is the result of the continued rise of non-commodity costs.

In a deregulated state like Illinois, specifically the ComEd service territory, a customer can purchase their energy from an alternative supplier and receive the distribution only from ComEd. The distribution is regulated, with ComEd being guaranteed a rate of return based on their costs and all changes being ratified by the Illinois Commerce Commission. While the energy supply can be purchased from an alternative supplier, the prices that the suppliers quote usually include other charges in addition to just the electrons that the customer consumes, which causes some confusion with consumers. We will try and break down both energy and distribution charges to provide some insight to these different non-commodity costs.

Energy Portion

While there are several items that make up this portion of a customer’s bill, we only consider energy and losses as direct energy/electricity charges, and we think many of the other “energy” charges are non-commodity in nature as the customer cannot always control the outcome.

Energy: these are the electrons that a customer consumes. Typically, in a procurement process, a customer will receive prices for 12, 18, 24, and 36 months. The prices are derived from existing and constantly fluctuating forward curves for energy that exist in a forward/futures market. These forward markets are simply expectations of what spot prices will be in the future. The prices are also influenced by a customer’s load profile. A customer who uses more power during the peak period of weekdays will be charged more per unit than a customer who uses the same amount of power 24 hours a day. A good general rule is, the higher the variability of a customer’s load, the higher the price (all else being equal).

Losses: electricity loses volume as it goes through the electricity grid, which is usually driven by site location. In the ComEd areas, it is about 6-8% of contracted volume so if a customer requires 1000 KW, they will need to contract somewhere between 1060 and 1080 KWs. This percentage is an energy charge since it is electricity that is being priced. Customers can choose to have losses included in their fixed energy price or have them passed through at market rates.

Other Non-Commodity Energy Supply Charges

Capacity charges: In ComEd, the capacity charge is a charge that is determined by PJM. All customers in PJM pay their share of capacity costs. Simply put, capacity is the amount of electricity generation that PJM determines it needs to have available to meet all possible peak demand situations. Customers’ obligations are determined each summer (June 1-Sept 30) for the following load year (June 1-May 31) by measuring customers’ peak load on the five highest load hours that the PJM experiences during that summer, which is why we notify our customers each summer of the possible hours that could be used. If the customer can reduce demand for those hours, it will result in a lower capacity obligation and lower overall costs. The actual unit capacity costs are determined in an auction three years ahead of the obligation period. The unit capacity cost is quite variable but certainly has been trending upward the last few years with a low of $16.74 per MW Day in the 2012-13 obligation period to $153.61 per MW Day for the 2017-18 obligation period, an increase of over 800%. The price for the 2018-19 obligation period is currently expected to be $215.00 Per MW Day, and it should be $202.00 per MW day for the 2019-20 period.

 
Chart Represents - PJM/ComEd Yearly Capacity Price
 

Network Integration Transmission Charge (NITS)

This is also a PJM charge. This charge is related to the costs of transmission of electricity from one point to another on the wires that PJM manages. This is not a ComEd distribution charge but is closely related. The cost is determined each year by PJM and has also been trending upward each year as the costs of maintaining the grid has increased. In percentage terms, the charge has risen 47.94% from January 2015 to June 2017. This charge is measured based on a customer’s monthly high demand. Therefore, it is possible to reduce this charge if a customer can introduce efficiencies that will reduce the monthly high demand number. This is a charge that can be fixed or passed through. It must be stated though that there have been circumstances where PJM has increased the NITS charge without warning, and suppliers have charged customers for the increases under the “Change in Law” clause that exists in almost all retail electricity contracts.

 
Chart Represents - Client example of Cost of Power Deliver January 2015
 

Ancillary Charges

There are several services that PJM provides to the electricity grid that customers must pay for. Examples of such services are Frequency Regulation where, in general terms, generators are paid to respond quickly to the gaps between generation and demand to keep the grid balanced, and Spinning Reserves, which responds to the direction of the grid operator in ten and 30-minute increments. These costs are generally predictable, but they do fluctuate with and are correlated to market prices and can soar during times of stressed electricity pricing. The Polar Vortex is a good example of this.

Retail Delivery Charges

These charges are the regulated charges and appear on the retail distribution part of the bill. There are many different charges, and they change according to customer size. We would like to talk about the major bill categories and the increases that have occurred.

Customer Charge (CC)

Every customer pays a fixed customer charge to the utility, and this charge has been steadily rising. These customer charges vary according to customer size. Starting in January 2017, charges for small non-residential customers

Distribution Facilities Charge (DFC)

The distribution facilities charge is the main delivery charge, and it is based on each customer’s demand. In ComEd, these charges have also risen year-on-year with estimated 2017 charges rising 7.28% for the small customer class, 8.59% for the medium load customer class, and 5.50% for the large customer class from 2016 prices.

 
Chart Represents - PJM/ComEd Yearly Average Load
 

Conclusion

Over the last decade, we have seen incredible gains in energy efficiency, demand-side management, and increases in the use of renewable distributed generation. One impact has been that it has stressed the resources of regulated utilities as they have lost revenue due to flat load growth, lower peak demand, and the increased costs of accommodating intermittent energy resources. These regulated price increases reflect that reality.

Analyst – David Mousseau
Information Sources – PJM and ComEd


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