By Howard Plante, Vice President of Procurement
As the Summer Season approaches, it is time to remind everyone of the reason for reducing electricity use during the Annual System Peak Hour in New England. ISO-NE established the Forward Capacity Market to ensure that the New England power system would have sufficient resources to meet the future demand for electricity. Forward Capacity Auctions (FCAs) are held annually to set the Capacity Price (Net Regional Clearing Price) three years in advance of the operating period which runs from June 1st to the following May 31st. Resources participate in the auctions to supply capacity in exchange for a market-priced capacity payment. These payments help support the development of new resources, help to retain existing resources, and incentivize investment in technology or practices that help ensure strong performance. They also serve as a stable and much needed revenue stream for resources that help meet peak demand but do not run very often the rest of the year. Without the capacity payments, those resources would not be able to financially survive.
What is the Annual System Peak?
It is the single hour of the calendar year that is the highest total demand for electricity in New England. New England is a summer peaking region due to the increased electricity use for air conditioning, dehumidification, and cooling. The Peak is most likely to occur at some hour in June, July, or August on an extremely hot and humid day. In recent years, the Peak has shifted from predominantly hitting in the 2:00-3:00pm hour to later in the afternoon, with the last two years occurring at the 5:00-6:00pm hour. What changed? Solar Power. Over the past several years, the gradual increase in solar installations behind the meter have helped to reduce demand when they are at peak output in the middle of the afternoon, forcing the Peak later in the day.
What is a Capacity Tag?
Every electricity account has a Capacity Tag (Cap Tag) associated with it. The Cap Tag is assigned to the account by the local distribution utility and is based on the account’s demand for electricity during the Annual System Peak. The Cap Tag becomes effective in June of the following year and remains in effect for 12 months.
The Net Regional Clearing Price sets the base Capacity Price. The Capacity Price is adjusted to reflect each year’s Annual System Peak to align with the amount of resources that cleared in the Auction. Your cost of capacity is a result of your account’s capacity tag multiplied by the adjusted Capacity Price. That cost gets included in your electricity rate by the Supplier or by the utility. Everyone pays for it, regardless of where you obtain your supply from. On average, the cost of capacity is 1.5 to 2 cents per kilowatt-hour and in most cases is the second highest component of the overall rate.
How can you Reduce your Capacity Cost?
If you have an interval account (the meter reads hourly usage data) and are able to curtail your electricity use during the Annual System Peak hour, your Cap Tag and Capacity Cost would be reduced. The more electricity use you reduce, the greater the cost reduction. If you have recently entered into a multi-year all-inclusive fixed price contract that does not have a provision for capacity reduction, curtailing this summer is likely not necessary, but you should confirm the details with your Freedom Energy advisor.
How will you know when to Curtail?
Freedom Energy sends notices each year when we believe the Annual System Peak will occur. By monitoring and analyzing grid conditions, weather forecasts and historical data, we try to predict when a particular day could result in the Peak. You will likely receive a notice 1 to 2 days in advance as a preliminary heads up, then a confirming notice the morning of the anticipated day. On average, we have sent 3 notifications each summer. There is no definitive means of precisely determining when the Peak will happen, but we do our best to inform you accordingly and with as few notices as possible. The first heat wave in June in most years has necessitated notification, which then sets a target Demand that must be exceeded for subsequent notices. In the past 20 years, the Peak has never happened in September and only twice in June.
Stay tuned, nothing is guaranteed.
About Freedom Energy Logistics: Founded in 2006, Freedom Energy Logistics is a leading energy advisory. The private company offers comprehensive energy supply management and renewable energy solutions supporting energy goals and sustainability objectives for businesses and organizations throughout the U.S. Freedom’s team of energy experts has worked with and delivered energy saving, environmentally responsible solutions for some of the largest commercial and industrial companies, municipalities, universities, healthcare facilities, and businesses. With its headquarters located in Auburn, NH, Freedom Energy also has employees serving clients locally throughout the regions. Freedom Energy has been twice named to the Inc. 5000 list of fastest growing companies in America; recognized as one of the Fastest-Growing Family Businesses in NH by Business New Hampshire Magazine. Stay Work Play’s Coolest Company for Young Professionals; and received multiple Business Excellence Awards from New Hampshire Business Review. For more information, visit www.felpower.com.