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Defining Important Frequently Misunderstood Energy Terms: Part 1

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Buying electricity is complex enough without having to learn a new language. Unfortunately, industry terms and TLAs (three-lettered acronyms) are part of almost every conversation. I thought I would take a crack at explaining a few that are important and frequently misunderstood.

PLC = Peak Load Contribution
The PLC, in terms of electric capacity, represents an electricity consumer’s maximum kilowatt demand, and is the amount of generating capacity based on the customer’s account usage, which must be provided for system reliability. Your energy supplier uses your account’s capacity PLC when determining your account’s rate schedule and load profile, which sets its billing rate. 

Why does this matter? Higher PLCs generally equate to higher billing rates, both, for energy from a retail supplier, and for your T&D (transmission and distribution) rates. In general, a lower PLC, compared to overall usage, will result in lower costs. It is in your best interest to manage your demand to try and reduce your PLC.

LMP = Locational Marginal Pricing (or LBMP = Locational-based Marginal Pricing)
LMP is the calculated price of electric energy at every location on a given electric system. It is a market-pricing approach used to manage the efficient use of the transmission system, especially when congestion occurs on the bulk power grid. LMP provides market participants a clear and accurate signal of the price of electricity at a node, load zone, reliability region, or a hub. These prices, in turn, reveal the value of locating new generation, upgrading transmission, or reducing electricity consumption- elements needed in a well-functioning market to alleviate constraints, increase competition, and improve the system’s ability to meet power demand. An in-depth explanation of LMP can be found here:

Why does this matter? Besides contributing to market efficiency through transparency and as a price signal, any customers buying via an indexed product structure are buying energy at the LMP. LMP trends can also impact forward prices that drive fixed price offerings for future terms.

CONE = Cost of New Entry
In regard to the electric power grid, CONE is the cost to develop and bring into service any new piece of equipment. However, it is generally used in reference to building a new generating unit. This is critical for long-term ISO (independent system operator) planning to ensure reliable power supplies. It is also a factor in determining capacity prices in markets such as PJM (Pennsylvania, New Jersey, Maryland), NYISO (New York), and ISO-NE (New England). CONE is sometimes used as the price of capacity, in dollars per kilowatt-month that is needed to attract sufficient new capacity. 

Why does this matter? CONE is a driver of long-term energy prices, especially as the grid evolves with the building of new natural gas plants to replace retiring coal plants.

CAPP = Central Appalachian Coal
CAPP refers to the spot prices for Central Appalachian coal, the most widely referenced prices for eastern coal in the United States. Coal producers, electric utilities, merchant generators, non-utility industrial coal users, and other energy marketers use CAPP spot prices as a benchmark in both physical and financial transactions for short-term and long-term contracts. Changes in CAPP spot prices can affect fuel procurement and power dispatch decisions when compared to costs of others fuels, such as natural gas. 

Why does this matter? The economics of fuel switching for power generation have become a critical driver of both natural gas and electricity prices over recent years.

NIMBY = “Not in My Back Yard”
NIMBY is a derogatory or critical term characterizing the opposition by residents to a proposal for a new development because it is too close to them, often with the connotation that such residents believe that the developments are needed in society, but should be located further away. Projects likely to be opposed include, but are not limited to, fracking operations, oil or natural gas wells, wind turbines, power plants, cell phone network towers, landfills, prisons, or highways. 

Why does this matter? It is important to realize that, while solutions to market problems may seem straightforward and economical, there are other obstacles that may delay development of any solution.

Contango vs. Backwardation
Contango is a situation where the futures price (or forward price) of a commodity is higher than the expected spot, or current price. In a contango situation, hedgers (commodity producers and commodity users) or arbitrageurs/speculators (non-commercial investors) are willing to pay more now for a commodity at some point in the future than the actual expected price of the commodity at that time. This may be due to a willingness to pay a premium to ensure deliverability of the commodity in the future, rather than paying the costs of storage and carry costs of buying the commodity today. A market “in contango” may be due to expected changes in future supply and demand. For example, the expectation that the U.S. will eventually export natural gas via LNG (liquefied natural gas) facilities has contributed to a contango forward curve for natural gas.

The opposite market condition to contango is known as backwardation. A market is “in backwardation" when the futures price is below the expected future spot price for a particular commodity. This may occur during periods of extreme weather, when short-term prices can rise dramatically, and long-term prices are relatively unchanged. 

Why does this matter? The shape of the forward curve may impact a strategic decision to lock in prices for short-term versus long-term.

Posted: December 23, 2013