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How to Manage Your Capacity Costs in PJM

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Several weeks ago, we posted an article describing how the PJM Capacity Markets affects your overall retail energy price. This is a follow up to that article.

In general, capacity costs make up approximately a quarter of a customer’s total energy spend, which is the second highest contribution after the underlying wholesale energy portion of your electric bill. Unfortunately, consumers are price takers when it comes to capacity prices, meaning they can’t participate in the auctions that set the price for capacity.

However, similar to being able to reduce the cost of your overall electricity bill by reducing consumption, there are actions that a customer can take to reduce costs. If a customer is able to reduce their Peak Load Contribution (PLC), then they would be able to reduce the capacity line item on their bill. Let’s first take a look at how the PLC is set by the Independent System Operation (ISO), and more specifically, the PJM Interconnection that encompasses most of the Midwest and Mid-Atlantic States except New York.

PLC is an entity’s share of usage during periods of maximum usage on the electricity grid. On an annual basis, each utility (or Local Distribution Companyor LDC) is required to calculate and report its peak load contribution to PJM. At the end of a summer season, PJM will identify the five highest peak load hours that occurred on different days during the period from June 1 through September 30. The LDC will then determine each customer’s specific load during these hours and the customer’s PLC will be an average of these five hours’ usage. This average is called a “Capacity Tag” and applies to the next capacity year (June – May).

In regards to the impact on retail energy price, a customer’s PLC will be multiplied by the capacity rate, then divided by total usage for the same period which results in a $/MWh (or cents/KWh) rate that applies to their final retail energy price.

Here is an example:

1-month usage: 650,000 kWh
Capacity PLC: 1,500 kW
Capacity Price: $0.90/kW-month
Total Cost= $1,350
Capacity Rate= $0.00208/kWh

For those customers not in the PJM region, the process is slightly less complicated. In NEPOOL and NYISO only one peak demand hour is used, but the rest of the calculation remains the same. In ERCOT, no capacity market exists.

The question becomes what can the customer do to manage this portion of their cost? As noted above, customers are price takers for the rate applied to the capacity tag. However, if a customer is able to reduce load during critical peak hours, then they will effectively be able to reduce costs for the following year. This is where retail energy providers such as Direct Energy can help.

Direct Energy monitors weather and load trends and sends out a notification when peak demand days and hours are expected. All the customer needs to do is curtail energy during these intervals. The goal is to reduce usage during these periods, which will then reduce a customer’s capacity tag for the next year. The savings can be significant depending on the retail electricity product.

Please sign up today to receive notification alerts from June through September, and to learn more about peak load contribution and curtailment. Direct Energy has accurately predicted the top five peak days this year.

Posted: September 27, 2013

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