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Electricity Pricing: Property Specific Dynamics

Why All Rates Are Not Created Equal
  • May 31, 2018

Even if two buildings used the same amount of electricity one month, their bills may be completely different.  When attempting to cut energy expenses, property managers may compare their buildings against peers.  However, this can be misleading because all electricity pricing is specific to the property’s characteristics.  So, what is it that makes all electricity prices not created equal?  Why is Property A 10.5 cents per kWh, while Property B is 8 cents per kWh?

Property Specific Dynamics:

All electricity prices are set uniquely to each account, depending on several different inputs.  Even if Property A is priced 2.5 cents higher than the Property B, it does not necessarily mean that one of your accounts is being overcharged.  To understand what makes up electricity pricing, we must break down the rates to their property specific dynamics:

  • Peak Load Contribution (PLC) –
    Your PLC or installed capacity tag (ICAP tag) is determined by your property’s contribution to the grid’s overall peak load. All else equal, the higher your PLC/ICAP tag, the more capacity you need to purchase, thus the higher your $/kWh price since the grid has to be prepared to meet your peak demand at any time.  Your monthly payments are made up of both the energy you consume (the kilowatt hours) and the amount of energy that needs to be available to meet your account’s demand based on your PLC/ICAP tag.  Depending on your deregulated territory, each peak load contribution is determined differently:

    • NYISO – Your peak load contribution (PLC), or installed capacity tag (ICAP tag), is determined by your usage during the single highest peak hour from the previous year. The peak hour is the hour during which the usage was the highest across the entire NYISO grid (not just your zone or utility). Your ICAP tag is effective each May 1 to April 30.
    • PJM – Your PLC tag is based on your peak demand usage during PJM’s five Coincident Peak Hours during the previous June 1 through September 30 period. PLCs are effective each June 1 to May 31.  Additionally, PJM has a PLC for your transmission obligation.  Transmission charges are calculated based on the network service peak load contribution tag (effective Jan 1 to Dec 31) multiplied by 1/365th of the applicable Network Integration Transmission Service (NITS) rate times the number of days in the billing period.
    • ISO-NE – Your peak load contribution (ICAP tag), is determined by your usage during the single highest peak hour from the previous year. The peak hour is the hour during which the usage was the highest across the entire ISO-NE grid (not just your zone or utility). Your ICAP tag is effective each June 1 to May 31.
  • kWh Usage/Load Profile – 
    A load profile shows how an electricity customer uses its electricity over a period of time. If there’s a difference in the total amount of kWh and the on- and off-peak split of the usage, then there will be a difference in the supply $/kWh as well.
  • RFP Timing – Electricity pricing can be very volatile and change each day since it is a traded commodity. A few weeks difference between contract execution dates can mean a big difference in power and capacity pricing.
  • Contract Term Length – The term length of your contract can vary (e.g. 12 months vs. 36 months). The capacity, kWh, and load profile could be the same, but a difference in contract term lengths will affect the pricing of each component.

In fact, the most likely scenario is that when prices are compared across accounts there will be multiple differences due to property specific dynamics.

Due to the complexity that comes with determining electricity prices, working with energy market experts is crucial to know if you are being overcharged by your supplier or broker.  Purchasing electricity requires an understanding of not just the commodity market, but also of regulatory developments, supplier contract terms and conditions, and your operations (future leasing, production, ECMs, etc.).  Low price alone should not be the deciding factor; and in many cases, a bid that appears to be the “low price” may cost you more.  Work with a company that understands all aspects of a strategic procurement plan and will partner with you for the optimal electricity pricing strategy.