As we approach the summer season, we want to provide some information to help you decide whether curtailment this summer to reduce your capacity tag makes sense and what the relative cost savings are. The Annual System Peak will occur in June, July or August, and curtailment will define your Capacity Tag effective June 2024 through May 2025. Although each account’s capacity cost is unique, the overall cost of capacity has been steadily going down since Capacity Period 2018-2019 when it hit its highest point (effective from curtailment in the summer of 2017), hitting a low for Capacity Period 2023-2024. The cost for the 2024-2025 period increases slightly from the 2023-2024 period.
After speaking with several end-users regarding curtailment last summer, many elected not to curtail due to the expense of disrupting manufacturing operations compared to the savings. Although curtailment during the annual system peak also helps to reduce the need to plan for additional future generation, we recognize the cost is difficult to justify for many.
How is Capacity Cost Established?
The Capacity Cost (Clearing Price in $/kW-month) is established through the Forward Capacity Auctions held three years in advance of the Capacity Period. However, a second component referred to as the Reserve Margin is not known until after the Annual System peak occurs and is a function of the Annual System Peak and the amount of generation that participated in the Auction. The Reserve Margin essentially increases each account’s capacity tag by a ratio of the MW of generation that was secured in the Auction that must be paid at the Clearing Price, and the Peak MW value.
As an example:
- Annual System Peak = 24,000 MW
- Cleared Generation = 32,000 MW
- Reserve Margin = 32,000 MW/24,000 MW = 1.333
For purposes of providing an estimate for the Effective Capacity Cost that will be established this summer for the 2024-2025 Capacity Period, we are using the average of the Reserve Margin for the past several years of 1.4. The Clearing Price is different for each zone. Based on information currently available from ISO-NE (Independent System Operator New England), the estimated Effective Capacity Price including the Reserve Margin is depicted in the table below, as well as the estimated cost savings per 100 kW of reduction in your Capacity Tag that would be realized by curtailing this summer.
As the amount of behind-the-meter solar generation has increased over the past several years, it has caused the Annual System Peak to occur later in the afternoon, 4:00 to 5:00 pm in three of the last six years, and 5:00 to 6:00 pm in two of those years. Prior to 2017, the peak predominantly occurred from 2:00 to 3:00 pm. However, the Peak unexpectedly occurred in the 3:00 to 4:00 pm hour last year.
Annual System Peak Background Information
The Annual System Peak is the single hour in the calendar year that results in the highest demand for electricity New England wide. The electricity for that demand must be produced instantaneously, and the ISO-NE must ensure that it has adequate generation to meet that peak demand. New England is a summer peaking region due to cooling, air conditioning, and dehumidification; therefore, the Peak will most likely occur in June, July, or August on an extremely hot and humid day.
A component of your electricity supply cost is a capacity fee. The capacity fee is assessed based on your electricity usage on the Annual System Peak. Your demand for electricity use at that peak hour will be assessed as your “capacity tag” effective June 1 of the following year and will define your capacity fee for 12 months.
Freedom Energy takes a proactive approach in assisting its clients with lowering their capacity tag by reducing electricity use during the Annual System Peak hour. Each day we monitor and evaluate factors influencing grid demand, weather forecasts and historical data to predict when that peak hour may occur. Notifications are usually sent to clients two days in advance of a potential peak, typically 3-5 times each summer.
Freedom Energy has saved our clients significant amounts of money over the past 10 years with the Capacity Tag Management program. There is no cost to be on the notification list and it is just another way in which we help to lower your overall energy costs.
Have questions, need more information, or want to participate in Freedom Energy’s Program? Please contact us.