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The Other Half of the Energy Bill: Why You Should Think Beyond Supply

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It’s a good time to be a commercial energy buyer – at least it looks that way on the surface. 

According to Forbes, you’ll pay less for electricity supply today than you would have 10 years ago. Natural gas prices are low, and renewable energy becomes more affordable each year with the surge of new technologies. Together, these sources are filling the gap left by declining coal power. In fact, PJM reports that wholesale power prices have dropped by 25 to 40 percent.

Seems like good news. If kilowatt per hour electricity costs have fallen, your monthly bill should have dropped, too, right? 

Fact check: most consumers are actually paying more for electricity than they did five years ago – an average of eight percent more. 

Adjusting for inflation, energy bills are up in just about all regions of the United States. But if energy supply is cheap, what’s going on?

Why your bill went up as supply prices dropped

A quick refresher on your energy bill. It has two parts:

  • Supply charges, which vary based on how much you use each month, and are charged by your energy supplier.

  • Mandatory fees, which are calculated by your utility or power pool, and don’t change based on the market or your monthly consumption. 

The status quo has been this: budget conscious business leaders are wise to choose an energy strategy with the lowest kilowatt hour supply price. Supply rates are still the primary way that energy plans are advertised. 

A simple Google search for “why is my electric bill so expensive?” or “how to save money on energy” confirms the status quo – there’s tons of information about how to reduce energy supply costs. Consumers have easy access to tips and tricks for cutting energy consumption, from identifying phantom load to changing out old devices for energy efficient ones.

Since energy supply used to account for 70 percent or more of your bill, this made sense. Managing cost (choosing a low rate) and reducing quantity (implementing efficiencies) are intuitive strategies for controlling the budget and cutting down on monthly costs – sometimes significantly. 

But supply is no longer the primary cost. Today it’s not uncommon for supply to account for only 50 percent of your bill. The other half is made up of mandatory fees; and they’re eating up larger and larger potions of your total energy bill.

Why are mandatory fees going up?

Line item charges differ from one utility to another. But all utilities, power pools and/or regulating bodies are responsible for:

  • Energy infrastructure (the poles, wires, transformers, stations and plants that deliver energy to your business)

  • Capacity and reserve margins (ensuring there’s always enough energy for all consumers, even in the case of unexpected demand)

These are the fees you pay before the meter even starts running. They’re the charges that used to be small – usually 15 to 30 percent of your bill. Today, they’re double or triple that, often accounting for half of the bill. 

Why is this happening?

The United States energy grid is old and failing. Power lines can’t keep up with the high electricity demand of today. Severe weather, (like hurricanes or heat waves, for instance) further tax our increasingly inefficient system. Many utilities are also subject to new reliability and efficiency regulations. Considering all of these factors, our infrastructure is barely getting by.

Energy utilities are investing more in their infrastructure than before, leading to a sharp rise in costs to pay for upgrades.

For example, consider investments in transmission infrastructure made by major utilities across the United States over ten years:

Investment In Transmission Infrastructure By Major Utilities (1996-2016)

Source: U.S. Energy Information Administration, Federal Energy Regulatory Commission (FERC) Financial Reports, as accessed by Ventyx Velocity Suite.

Such costs for electricity grid improvements are usually passed on to customers. Not surprisingly, energy consumers have seen their non-supply fees surge in response. 

On top of the steep rise, you might be surprised by how some fees are calculated. For example, the amount you’re billed for one specific item, capacity, is not based on your annual energy consumption, (i.e. smaller energy consumers pay a smaller share) as you might expect. Instead, capacity charges are calculated based on how much you use during a handful of hours each year. You can discover the nuances of peak load contribution in our recent post.

We all need safe, reliable and efficient energy infrastructure. And we need the assurance that power will be available at all times. But how large can mandatory fees grow before a traditional fixed pricing structure no longer makes sense for large businesses? 

How to reduce the other half of the bill

In our opinion, it’s already past the breaking point.

It’s time to stop focusing solely on electricity supply. When mandatory fees make up a large portion of your bill, ignoring them means missing a major opportunity to lower your total costs.

Savvy business leaders in large organizations need visibility and control over all of their energy spending. Direct Energy Business has a new era strategy that gives it to you. 

To learn more about how Fixed Energy Plus can set your business up for success, download our report “Electricity is Cheap, so why is my bill so expensive?”

Download the Report

Posted: July 18, 2018