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Deconstructing Your Energy Bill: Capacity Charges

Posted by EnergySMART on Aug 6, 2012 4:53:00 PM

If you’re like most people, when you get your energy bill, you look at the amount due and perhaps consider the total usage (kWh) that drove that month’s expense. Beyond that, though, you likely haven’t given too much thought to all the different pieces that get added together to make up your bill. Understanding each component, however, can help you manage your overall energy expense.

After Generation costs, Capacity charges are often the second largest cost-per-kWh on your bill. A Capacity charge is typically based on your “peak” energy use during a specific period. Depending on your location, the Capacity charge may be set annually or monthly. With Capacity charges, you are paying for the availability of your peak usage regardless of when it occurs. Put another way, you are paying the grid operator to have the capacity to meet you peak demand, even if you rarely use your largest expected amount. Similarly, power generators and transmission owners are paid for the capacity they commit to the grid, whether or not they are called upon to deliver it. Under this structure, you, as an end-user, can be paid a Capacity charge (called, in this case, a Capacity payment) for participation in Demand Response (DR) programs.

Generation Capacity charges are the basis for Demand Response payments for those customers who are able to curtail their electricity use according to the specific DR program rules in their market. The amount that a customer gets paid for its ability to curtail in a Demand Response program is directly related to the Capacity costs set by each Regional Transmission Operator (RTO) in the customer’s utility zone. An RTO is an independent organization that has exclusive responsibility for electricity grid transmission and reliability.

Although Capacity charges for generation and transmission are billed through the customer’s utility, these costs are established through each region’s RTO. Specific Regional RTOs include PJM Interconnection (mid-Atlantic), New York Independent System Operator (New York State), and Independent System Operator-New England (New England States). Each sets the costs for generation capacity and has its own rules as to how this capacity is priced. Auctions are held within each RTO to determine the capacity price for a given delivery period. PJM and ISO-NE set their prices three years in advance, with incremental auctions to allow for adjustments. NYISO has an auction one month before the delivery period and monthly auctions to determine a monthly capacity price. Transmission costs, meanwhile, are set by each transmission owner and paid to the RTO, but must be approved by the Federal Energy Regulatory Commission (FERC).

In PJM, each end-user’s generation capacity charge is based on their demand during the five peak hours for the entire PJM Zone from June through September; this is called their peak load contribution (PLC). The transmission charge in PJM is set on the one coincident peak hour of demand in the end-user’s utility zone, and is adjusted and finalized by the distribution utility. NYISO and ISO-NE base their capacity charges on the single peak hour within the network. The customer’s coincident peak demand is adjusted for weather and system scaling factors, and utility specific rules.

If this sounds complicated, it’s because it is! But EnerNOC’s SupplySMART team can help you navigate and manage your supply costs. In fact, because the rules for setting capacity charges are relatively formalized (though complex), customers have very real opportunities to control supply costs by managing their peak demands. Customers in PJM can use EnerNOC’s PLC predictor service, for example, to assist in reducing their capacity charges year-on-year and minimizing the charge in future years.

EnerNOC helps you manage your capacity costs and structure appropriate contracting and risk management strategies to maximize the value of your demand curtailment activities. For more information on how RTO prices and capacity charges are calculated, as well as how to manage your company’s costs, contact your EnerNOC account manager or a member of our SupplySMART team.

Topics: demand response, savings tips, peak demand

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Sarah McAuley

Sarah's been bleeding EnerNOC blue for the last five years as the Director of Marketing Communications. Prior to joining the team, she worked in the telecom industry, trying to convince telecom carriers to ditch antiquated switching technology and adopt voice-over-IP. She knows that uber-regulated industries like telecom and energy can have their challenges, but she's always loved being in the throes of an industry undergoing massive transformation.

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