Time for a new Capacity Strategy?
WHAT IS CAPACITY?
Capacity is the maximum output that a generating facility can produce. It is used by Independent System Operators (ISOs) as a barometer to effectively determine their region’s future supply capabilities. Essentially, ISONE helps facilitate the flow of payments from suppliers (buyers) of electricity to the generating facilities (sellers).
Each of your utility accounts are annually assigned a capacity tag which is based on your electricity demand during the Annual System Peak (the single highest hour in the calendar year for electricity demand throughout New England). Your demand during that single hour is assigned as your ‘capacity tag’, which begins in June of the following year and remains in effect for 12 months (June – May). Your monthly capacity cost is then calculated based on your individual capacity tag and the cleared auction price. Your account’s capacity tag (or it’s cost) does not appear on your utility invoice, so often it gets overlooked.
This capacity charge is a monthly cost, regardless of your total use. For commercial and industrial end-users, the capacity charge you pay on a monthly basis is directly correlated to your usage patterns.
HOW EXPENSIVE IS CAPACITY?
Regardless of size, all end-users of electricity are ultimately responsible for the payment of capacity. Your monthly capacity charge can account for 20-30% of your supply cost (roughly 10-15% of your monthly electric spend). The effective capacity rate for standard commercial and industrial companies can vary from $0.0075 /kWh to $0.03 /kWh. If your facility’s average annual usage is 5,000,000 kWh (417,000 kWh monthly) then your monthly capacity cost could range from $3,000 – $12,000 (depending on time of use pattern).
Clearly, capacity is an integral piece of your overall cost-reduction puzzle and one that can be managed more effectively. Commercial and industrial companies should be aware of these costs and understand that they have options when it comes to handling their capacity cost in the retail market.
THE “CAPACITY PASS-THROUGH” OPTION
It is now more imperative than ever that buyers are comparing prices “apples to apples”. The days of the simple fixed rate have evolved. It is critical to ensure that your contract includes all intended components of the rate, and our energy consultants take great lengths to highlight these rate components.
We suggest that you now consider opting to take your Capacity charge as a direct pass-through, paying the actual monthly rate vs supplier’s annualized estimates. Typically, buyers prefer the all-in fixed rate because it is cleaner, more ‘cut and dry’. But in a decreasing Capacity Market, the supplier benefits from the forward decreases in cost, because their contracted rate was based on a higher fixed estimate. For the sake of receiving an expected “All-In” rate, you allow the supplier to pocket from both the declining market and the likely occurrence of a lower 2020-2021 capacity tag (due to the effects that COVID-19 will have on this summer’s annual system peak).
IS THIS THE RIGHT STRATEGY FOR YOU?
Our recommendation is for our clients to consider passing through their capacity charge, paying the actual rate for their monthly capacity vs the typical fixed estimates. The timing for this suggested strategy is key due to the current pandemic conditions, and the ramifications of COVID-19 on numerous industries through this coming Summer.
We welcome you to speak with one of our energy consultants to discuss the potential of this strategy in conjunction with the individual nuances of your facilities.
About Freedom Energy Logistics: FEL is an energy management firm based in Auburn, N.H., that specializes in unique methods of electricity and natural gas supply purchasing. Founded in 2006, FEL serves the region’s largest manufacturers, municipalities and businesses. Pioneering the ‘Direct-to-Grid’ movement, many of Freedom’s customers source wholesale energy direct from the ISO NE Pool. FEL is among the thought leaders for Community Choice Aggregation in New Hampshire. FEL is named twice to the Inc. 5000 list of fastest growing companies in America and to the list of Fastest-Growing Family Businesses in NH by Business New Hampshire Magazine. Stay Work Play’s Coolest Company for Young Professionals. Led by father and son duo Gus and Bart Fromuth, they were awarded Business Excellence Awards from New Hampshire Business Review in 2019 and 2016. For more information visit www.felpower.com or call 603.625.2244.