How Demand Pricing and Capacity Tags Affect Your Energy Bill
When it comes to your energy bill, the past often determines the future. In deregulated electricity markets like New England, just one hour of high energy usage during the year can lead to higher bills the following year, as utility companies charge more to those that require additional resources.
These costs stem from power grid operators across large portions of the U.S. needing to be able to deliver sufficient energy during periods of high demand. For example, during hot summer months, additional air conditioning resources are being run, and this demand increase requires grid operators to tap into additional capacity from less frequently used power generation assets that may not be as efficient as what’s normally used.
Utility companies then have to buy additional capacity from the grid operator to serve their customers during these peak periods, and these costs ultimately get passed down to consumers based on how much capacity they require.
In other words, those that require the most capacity from the grid during peak periods are tagged with high energy bill capacity tags and thus, a higher rate for next year’s consumption.
Yet this type of demand pricing is not as simple as paying for exactly how much you use. If suddenly every business in New York doubled their energy usage, for example, the grid may not be able to handle it, since not enough power generators may be supplying energy at the time. As such, grid operators and thereby utility companies have to account for enough capacity in advance.
And they can forecast how much capacity they need by looking at the times with the highest energy usage and then purchasing enough to meet that demand the following year. So consumers are then essentially charged based on how much capacity they caused the utility company to purchase, even if they end up not needing as much the following year.
Depending on the market, this pricing can be based on a period as short as fifteen minutes during the grid peak day.
This concept is similar to how a retail store may increase staff during the holidays to meet increased demand. The store may look at metrics from the previous year to determine how many more workers they need at a given time. But in the event that less customers show up than expected, the company is still on the hook to pay those additional employees for the time they’re in the store.
Now suppose the store increased prices to account for the higher payroll costs. For customers that shop during the holidays at the same rate they do the rest of the year, they’re not causing a demand spike, and it would seem unfair if they had to pay higher prices just because other people created a surge.
With capacity tags, those that contributed most to a demand peak end up paying more to account for the higher capacity costs. However, this method can cause some unlucky consumers to end up with a higher rate if they consume an unusually high amount of energy during the peak period used to set the tags.
That’s why it’s so important to have tools like Energy Intelligence Software (EIS) that can provide detailed insight into your energy usage and bill. With EIS, you can break down your bill to find out if and how your utility company uses capacity tag charges. And if you are in that type of market, you can use historical and real-time data to get alerts when those peak periods are likely coming. So, if you can reduce your energy usage during those periods, you can minimize the costs from your capacity tag the following year.
Considering that associated capacity tag costs can comprise around 20% of your total energy bill, you’re missing out on significant savings by overlooking ways to reduce this cost.
Request a complimentary energy efficiency assessment to find out how Artis Energy’s RTIS® energy analytics platform can provide you with the visibility and insight to transform energy from a fixed cost into a distinct competitive advantage.