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.

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.

ERCOT wholesale electricity prices have been weak throughout the last several months. This is partially due to the movement in natural gas, but mostly due to Heat Rate trends. Heat rates can be used as a measure of power plant efficiency, but from a pricing perspective, reflect the relationship between gas and power prices, and are actively traded in the ERCOT market.

For more on how heat rates work, read our previous blog on this topic. Quickly, heat rate units of measure are MMBtu/MWh reflecting a quantity of gas to generate a MWh of electricity.

Capacity is a key price component within the retail power price for any business in the PJM markets that cover most of Pennsylvania, Ohio, New Jersey, Maryland and Illinois. While wholesale energy prices have fallen over the last few years, capacity rates have been volatile and are a sizeable portion of consumer rates.

The latest results of auctions for PJM capacity have followed this trend. In late May 2013, PJM announced capacity prices fell sharply for the 2016/2017 planning year during its base auction. More recently on July 26th, an incremental auction for the 2014/2015 planning year also saw a reduction in costs. Before we can look into how the results of these auctions will affect your bottom line retail energy price, we must first examine what the capacity market is and how it operates.