Do you understand each and every line item on your utility bill? In previous posts about energy bill management, we’ve walked through the factors that determine your electricity spend and the degree to which commercial and industrial customers can control those factors. It’s an all too common misconception that energy is a fixed cost. It’s not! And this post will help you better understand how to knock some dollars and cents off your monthly energy costs, which over time will translate into significant savings.
To dig in line-by-line, we’ll use a sample bill from one of our customers in the PJM region to walk through what each charge means and what you can do about it. The sample bill is from a single light industrial site (one of several facilities the customer has in the mid-Atlantic). The company contracts with a third party supplier for a mix of fixed price contracts and indexed contracts.
Utility Bill Overview
See the image below for the high-level breakdown for this customer. Overall, 74% of the bill is comprised of charges based on energy consumption (kWh), while 26% is comprised of demand charges (kW). Because this customer has a contract with a third party supplier, there are two electricity bills for the period:
- The supplier bill, related to the energy the customer has directly purchased from a provider, representing 81% of the total spend; and
- The distribution utility bill, related to fees to the utility for providing “last mile” distribution as well as for acting as the provider of last resort, representing 19% of the total spend.
Now that you have the 10,000 foot view, let’s get down to the nitty-gritty of deconstructing this customer’s electricity supplier and distribution utility bills.
Supplier Bill
The supplier bill is comprised of: energy charges, with prices both contractually fixed and floating with the market; system peak charges, including both capacity and transmission fees; and an array of ancillary fees and taxes. Again, this is the part of the bill related to the energy directly purchased by the customer.
Supplier Energy Charges – Block
What are they?
This customer has purchased a block of power for around 5% of its energy consumption. It has an “ATC (Around-The-Clock) Block” of consumption purchased at a low fixed rate and an “On-peak block” purchased at a higher fixed rate for peak periods. This block provides a guaranteed fixed rate at which the customer will be charged for the contracted energy consumed.
What can you do about it?
This customer bought a small block of ~5% of its load to provide some protection against rising prices. While the split between block and index contracts varies widely by customer, most customers tend to lock in a higher percentage of the total load with blocks. You control how much of your anticipated consumption is fixed vs. floating. The $/kWh price at which the block is billed is based on a negotiated rate with the supplier, but is influenced by the customer load profile as well as expectations of pricing levels and volatility over the term of the contract. You can increase your negotiating leverage with the supplier by flattening your load factor. Moreover, you can also leverage a competitive bidding process to ensure you secure the best pricing and terms.
Supplier Energy Charges – Floating
What are they?
Once the fixed energy block purchase has been exceeded, the remaining consumption for this customer is subject to hourly floating market rates for electricity. Because this particular customer is in PJM, those rates are determined by the Locational Marginal Price (LMP). That rate ($/kWh, varying by hour) is applied to the hour-by-hour consumption in excess of the block purchase. Unlike the block purchase for this customer, the floating rate is only for the energy, and the system peak and ancillary charges are charged separately.
What can you do about it?
While you can’t control the LMP price, you can control your consumption through capital investments such as energy efficient equipment or Energy Efficiency Measures (EEMs) and other operational improvements such as consistent night, weekend, and holiday shutdowns. You can also control the mix between the amount of your consumption you contract with a fixed and floating rate. Managing the amount of consumption that remains floating allows you to take advantage of market fluctuations by purchasing lower priced blocks when the market allows and averaging down your fixed rate block cost.
System Peak Charges
What are they?
The supplier must purchase generation capacity and transmission capacity in order to ultimately sell to end customers. End users pay for the supplier’s commitment through capacity charges (UCAP) and transmission charges (TransCAP). As with all customers in PJM, system peak charges throughout the year are based on a customer’s capacity tag (capacity Peak Load Contribution or PLC) and transmission tag (transmission PLC). PLCs are calculated for each electricity user based on their average electricity demand (kw) during the overall grid system’s highest demand hour during the 5 highest demand days during the summer months (June 1st to September 30th). System peak charges only occur in de-regulated regions, but other regions have their own rules for calculating system peak charges. For example, New England’s system peak charges are based on the single highest hour per year, and charges for ERCOT in Texas are based on what it calls the 4 Critical Peaks (4CP).
So, how is the customer then billed by a supplier for PJM’s charge? The supplier estimates the customer’s charges and bills for the amount the customer is expected to pay PJM for its portion of the supplier’s total UCAP and TransCAP charge, and that is reflected on the utility bill.
What can you do about it?
First, if you intend to manage your capacity and transmission charges, you must set up your supplier contract structure such that those charges are passed-through, i.e. capacity charges are not contractually defined, but changes in your capacity tag influence your rate. Once the contract structure is set up to be billed discretely for demand charges, those charges can be mitigated by curtailing consumption (again, speaking for PJM here) during the 5 hours of the summer with highest demand on the system (5 hours for capacity, 1 hour for transmission). Enel X assists customers across regions by helping to predict the grid's system peak hours to save customers on a significant portion of their bill. In the case of this customer, the system peak charge represents 20% of the customer’s total bill. Demand response can also be concurrent with system peaks, resulting in incremental benefits of participating in demand response programs through lower capacity tags.
Supply Service Fee
What is it?
Suppliers aren’t in business for free. They charge a Supply Service Fee to cover their cost to serve, e.g. operating costs, billing costs, and credit risk, as well as a profit margin. In some cases, the supplier fee will also include pass-through charges such as line losses and ancillaries.
What can you do about it?
The first step is to ensure that the fees you are charged are transparent as part of the supplier selection process. Second, those fees can and should be negotiated as part of the competitive RFP process.
Ancillary charges
What is it?
PJM and other grid operators must match supply with demand at all times in order to avoid blackouts. Ancillary charges cover the cost of grid reliability and keeping supply and demand balanced across the transmission system. Examples of these ancillary services are operating reserves, spinning reserves, regulation, black start, and frequency reserves. Charges for this sample customer are in the range of 2% of total spend.
What can you do about it?
Ancillary charges are typically not closely managed by customers, as customers cannot control the rates charged. However, because ancillary charges are typically billed based on consumption, energy efficiency measures used to reduce total consumption will also be helpful in reducing ancillary charges. Customers with more sophisticated block and index contracts and larger loads can also negotiate with suppliers to schedule more power in the Day-ahead market which typically carries lower operating reserve charges.
Distribution Utility Bill
The utility bill for this customer represents only 19% of total charges. Because the supplier is responsible for purchasing electricity generation and transmission capacity, the remaining fees are to the utility for providing “last mile” distribution as well as for acting as the provider of last resort.
Renewable/Efficiency/DR charges
What are they?
Many utilities are mandated by state Public Service Commissions to support programs to make the grid more efficient and reliable. Those programs, such as energy efficiency and renewables, are not always aligned with maximizing profit for the utility, so many regulators compensate utilities for lost profit by charging end users.
What can you do about it?
Customers can do their part by reducing consumption through energy efficiency measures, and by doing their homework on the energy efficiency incentive programs available in their local area. Since you’re paying for the programs already, be sure to take advantage of the funding available to you!
Facility Peak Charges
What are they?
It seems that almost every utility has a different term for facility peak charges; on this customer’s bill, these charges are referred to as “Delivery Service Demand.” The rate for these charges is determined by the published utility tariff. Not only the rates, but also the underlying rate structure, differ dramatically by utility. Even within the same utility, customers of different sizes, industries, and load profiles will be charged different rates based on the tariff to which they are assigned. The most common tariff structure involves application of the tariff rate ($/kW) to the peak kW reading within the month, i.e. your facility demand charge for the entire month will be determined by the highest consumption at a single point in time.
What can you do about it?
Real-time energy data monitoring can be key to mitigating facility peak demand charges. An application such as EfficiencySMART Insight not only provides visibility into when monthly peak charges occur but also features alerts to notify customers in real-time when demand thresholds are met. Minor adjustments in lighting or slight shifts in cooling for short periods of time can drive significant savings.
Taxes and surcharges
What are they?
Taxes are typically charges based on consumption. Tax rates for this customer are levied at the local level and franchise level. Additional environmental surcharges were also imposed.
What can you do about it?
As with renewable and energy efficiency charges mentioned above, there is little impact a customer can have over these charges above and beyond reducing consumption through energy efficiency measures.
You made it!
Still with me? While most of these line items will occur in bills in deregulated markets, your bill may differ from this customer’s. If you still have questions about your utility bill or energy supply purchasing in general, our team is always happy to help, just drop us a line.
