How Rising Capacity Costs Will Affect Your Energy Bill

March 1, 2018

Capacity costs, which typically make up the second highest contributor to the overall cost of energy supply, are dramatically increasing throughout much of the United States. In the Pennsylvania-New Jersey-Maryland (PJM) grid, capacity costs are expected to increase roughly 30% as of June 2018. This increase is the result of coal generators, which are struggling to remain operational in the modern era, continuing to shut down. Natural gas generation is on the rise, but it is more variable and less easy to transport than coal, meaning that some power grids are finding themselves having to pay more to ensure reliability.

But first, a brief discussion as to what capacity costs are. Essentially, capacity is a price paid to ensure that variable availability of power sources will not result in blackouts or brownouts, even on the hottest or coldest days of the year. That’s achieved through a capacity market, or a capacity auction, whereby a capacity rate is established to pay power generators for contributing their power to ensure reliability on the grid. The energy supplier (also known as a Load Serving Entity) charges customers based on their usage and the capacity rate. That fee is then remunerated to the power grid organization, who uses it to pay the generator. Ultimately, this means that the consumer is usually responsible for the cost of capacity, in some form.

Customers can reduce their capacity costs via peak load reduction. Though capacity rates cannot be controlled by a customer, the capacity tag (a measure of total kilowatt-hours used by a facility during the peak hour of the peak day in a region) is possible to adjust. That peak usage sets a customer’s individual capacity tag for future capacity years. By reducing power during peak usage days (periods of extreme cold or heat), capacity costs can be mitigated in the next year.

However, certain energy supply contracts (such as the type APPI Energy negotiates on behalf of its clients) are what’s known as “fixed, all-inclusive” contracts. This kind of contract seeks to create one price for components of energy supply costs, including capacity, transmission, and reliability-must-run (RMR) charges. This kind of product provides the customer with budget certainty, and lowers risk.

There exists some concern that rising capacity costs might influence a shift from these fixed, all-inclusive contracts. Increases in capacity rate are one of several events that suppliers may classify as a “change-in-law”, a standard provision in most energy supply contracts (even fixed, all-inclusive contracts) that establishes a way for suppliers to recoup increased costs by passing through that increase to their customers. It’s up to each individual supplier to decide whether or not to pass-through these costs, although they have the legal right to do so. 

At least one major energy supplier intends to address this quandary by modifying their fixed price product to pass through all capacity, transmission, and RMR charges at market rates. Essentially, this shifts risk back to the customer, while limiting the amount of change-in-law interactions the supplier has to have with the customer. A customer might end up paying more or they may end up paying less, but the end result is an increase in the assumption of risk by the customer, and importantly, provides them with less budget certainty.

APPI Energy is committed to transparency and providing our customers with the data to make informed decisions. Our preference is to present our clients with fixed, all-inclusive products where capacity, transmission, and RMR are established within the one price. Given the variability and wide spread of prices in any given market, we find that having one price to compare is the only way to accurately present a customer with a green-apples-to-green-apples choice. Therefore, if a supplier we work with chooses to abandon the fixed, all-inclusive product we typically offer, we will make our customers aware during our consulting process.

If you have questions about capacity, and wish to examine how your business may be affected by rising capacity costs, please contact us via our website, or call 800-520-6685 to speak with us directly. We will be happy to analyze your bills and provide expert recommendations at no upfront cost or obligation.