Energy 101 | Understand the Electricity Market and your Elecrity Bill
Regulated & Deregulated Electricity Markets
If your company operates in more than one state, or electricity grid, you may also be operating in both regulated and deregulated electricity markets. It is critical to know the difference between these markets when making decisions about electricity purchasing.
Electricity markets are highly diverse.
Regulated markets. In regulated markets, vertically integrated monopoly utilities cover the entire value chain – generation, transmission and distribution – with oversight from a public regulator. Customers in regulated markets cannot choose who generates their power and are bound to their local utility. Regulated markets dominate most of the Southeast and West.
Deregulated markets. In deregulated markets, non-utility market participants own power plants and transmission lines and sell electricity into a wholesale market. Retail suppliers purchase this electricity and sell it to end-users, and transmission companies or utilities own and operate the transmission grid. The entire ecosystem is managed by an independent system operator (ISO) or regional transmission organization (RTO). The utility, meanwhile, ensures that all power is distributed and all infrastructure is working properly.
Deregulated markets have opened up generation for competition from non-utility power producers in 24 states – including California, Texas and most states in the Northeast. 19 of those states have also introduced retail choice (see map), which allows customers to choose their own electricity provider and benefit from more competitive rates and generation options, including renewable energy.
It is important to note that electricity markets are not split clearly between regulated and deregulated states – some states, like California, remain partially regulated.
What type of market is your organization located in?
What does this mean for renewable energy procurement options?
If your company is located in a regulated state, it can be challenging or impossible to develop a large-scale renewable asset and claim inside your market. Utilities own most renewable energy projects and very few offer green pricing programs that fully meet the Corporate Buyers Renewable Energy Principles of cost-effective and impactful renewable power.
The good news is that even if you are located inside a regulated market, you can still procure renewable energy through indirect physical or financial contract structures via a power purchase agreement (PPA) for an asset located outside your state. Your company can then claim the economic and environmental benefits of your purchased renewable energy through ownership of project-specific renewable energy certificates (or RECs). Your existing grid power supply arrangement will remain in place while your company helps green the U.S. grid.
There are more options in deregulated states, some of which include incorporating renewables directly into your retail supply contract. There is also increased flexibility around contract structure and project location and scale.
Bottom line: The value proposition associated with large-scale renewable energy – lower costs, reduced future price risk, GHG emissions reductions and other strategic benefits – is available to all customers, regardless of regulatory regime.
Understanding Your Electric Bill
For many institutional end-users, electricity is considered an uncontrollable cost that is only thought of during the annual budgeting process. In the past, rates only went in one direction – up. These days, pricing is a bit more unpredictable – in 2016, natural gas prices reached a 17-year low – and this has caused the energy portion of most electricity bills to fall as well. But prices have recovered modestly in the years since and are expected to maintain their upward trend.
In the face of such volatility, it is critical for electricity users to understand what they are paying for on their electric bill, and why, in order to plan effectively for future energy expenditures.
What am I being charged, and can I do anything about it?
An electric bill contains multiple “line item” charges that come from varies parties and include taxes and special utility riders. They fall into three main categories, energy, distribution and other.
Energy charges. This is the largest and most straightforward charge – the cost of generating the electricity you consumed during the billing cycle. For grid power generation, this is mainly the cost of the fuel used to produce the electricity. If any of your energy is coming from renewable resources, the energy charge is how the renewable project owner recoups their capital costs.
In regulated markets, the energy charge comes from your utility. If you are in a deregulated market (see below), the energy charge may come from a third-party Retail Electricity Supplier (RES).
How do I reduce this charge?
The ways to address the energy portion of your utility bill are a function of the electricity market(s) in which your organization is located.
- In regulated states (or if you have already contracted with a RES), consider efficiency upgrades – LED lightbulbs, motion centers and enrolling in demand-response programs are all opportunities to reduce your use.
- In deregulated states, you should first check what rates RESs have to offer. In a competitive market, sticking with the utility’s standard offer rate likely has you paying more than you should.
- Of course, the most effective and efficient way to move the needle on electricity costs is to contract for large-scale renewable energy. How much value can a large-scale renewable energy asset add to your company? Use our calculator to get an indicative estimate.
Distribution charges. This is the charge incurred by delivering electricity to your buildings, owed to the local utilities that own and operate distribution infrastructure. This fee covers the cost of maintaining the power lines as well as pass-through charges for items such as Renewable Portfolio Standards.
Some utilities bill distribution charges as a function of demand, based on the average monthly peak amount of energy being used at your sites. Higher demand means a higher charge, in order to cover the cost of ensuring adequate distribution capacity and equipment exists to reliably deliver your power. In contrast, some utilities elect to bill customers as a fixed rate, while still others elect for a mix of both demand-based and fixed.
How do I reduce this charge? Distribution costs are decoupled from the price of generation and are tied to what it costs the utility to build and operate the lines – meaning they will likely rise regardless of changes in fuel costs. Behind-the-meter optimization (reduced consumption, onsite generation and energy storage) are the main options available to reduce this charge, but typically come with high price tags of their own. A well-structured large-scale offsite RE solution may be helpful as a hedge against rising distribution costs.
Other charges. These charges encompass all the other services involved in getting electricity from its point of generation to your local grid. They include:
- Transmission charges: Because generation assets are rarely located in heavily populated areas, electricity is transported over high-voltage transmission wires. The owners of these wires charge for access and this cost is passed through to end-users.
- Line loss charges: These charges arise because electricity cannot be transmitted without resistance, causing generators to put more power into the grid than is taken out.
- Taxes: There are generally several state and local taxes that make their way onto a given utility bill.
- Customer service charges: While these charges are typically embedded in other parts of the bill, in some utility territories, customer service charges appear as a separate line item.
How do I reduce these charges? The ways to address the transmission portion of your utility bill are a function of the electricity market(s) in which your organization is located.
- In deregulated markets, if using a RESs, find out where generation assets are located. The closer assets are to your site, the lower your transmission and loss charges will be.
- In all markets, consider how and when your organization uses energy and work to avoid spikes in use as much as possible. A single spike in use can add excessive demand charges to your bill.
- If your organization is considering a large-scale renewable energy solution, due diligence must include reviewing congestion around transmission lines and ensuring use of high-voltage lines for maximum efficiency. Oversupply drives market prices down and forces generators to recoup their costs through higher rates.
|California||Deregulated for some commercial & industrial consumers*|
|District of Columbia||Deregulated|
|Georgia||Deregulated for some commercial & industrial consumers*|
|Michigan||Deregulated for some commercial & industrial consumers*|
|Oregon||Deregulated for some commercial & industrial consumers*|
|Virginia||Deregulated for some commercial & industrial consumers*|
*States may be partially regulated/deregulated, regulated only in some utility markets, or deregulated for industrial consumers. Additional information available at the American Coalition of Competitive Energy Suppliers.