Understanding Your Organization’s Electric Bill to Reduce Cost and Risk
If you are like most people who come across electricity prices for your organization, it usually is only during the annual budgeting process, and even then they are often seen as an uncontrollable cost. In the past, rates only went one direction – up.
In early 2016, natural gas prices reached a 17-year low, but prices have recovered modestly since. As prices change and trend upward, it’s time to start planning for your company’s energy future.
There’s more to your energy bill than the price of fuel.
Understanding the component parts of your bill – what makes up each dollar spent per megawatt hour (MWh) – will make you better equipped to mitigate future price risk and take an active role in ensuring you pay the lowest cost possible, particularly as rates begin to rise.
What are my Organization’s Line Item Energy Charges?
As energy managers know, an electric bill contains multiple line item charges that come from various parties and include taxes and special utility riders. These charges fall into three main categories:
The largest and most straightforward charge is energy. This is the cost of generating the energy your organization consumes during the billing cycle. For grid power generation this is mainly the cost of fuel. If any of your energy comes from renewable resources, the energy charge is how the renewable project owner recoups their capital costs.
Taking Control of Energy Charges
If your business operates in a deregulated state, you should first check what rates RESs can offer. It is a competitive market and sticking with your utility’s standard offer rate likely has you paying more than you should.
If you are already contracted with an RES or are in a regulated state, consider efficiency upgrades. LED lightbulbs, motion sensors, and signing up for demand response programs will use less electricity and save more money. If your organization has already taken energy efficiency steps and is ready to move the needle on electricity usage and costs, a Large Scale Renewable Energy (LSRE) project is the most effective next step. LSRE projects are varied, and can be tailored to meet the load and procurement needs of each organization. Read more about LSRE.
Other charges represent line items that are involved in getting electricity from where it is generated to your local distribution grid – things like RES contract and service fees, transmission charges, line loss charges and demand charges.
Transmission Charges: Because generation assets are rarely located in heavily populated areas, the electricity you consume is transported over high-voltage transmission wires. The owners of these wires charge for access (much like a toll road) and this cost is passed through to end-users.
Line Loss Charges: Likewise, line loss charges arise because electricity cannot be transmitted without resistance, causing generators to put more power into the grid than you take out. There are a lot of technical factors at play.
Demand Charges: One of the more confusing items customers see is the demand charge. It is useful to think of electricity like water flowing through a pipe; the more you use at any instant, the bigger the pipe needs to be. The utility (who is responsible for maintaining the equipment that connects their distribution lines to your buildings) measures the monthly peak amount of energy flowing into your sites, typically over a 15-minute interval. They then calculate the demand charge based on this measurement to cover the cost of ensuring adequate distribution capacity and equipment exists to reliably deliver your power.
Taking Control of Other Charges
When considering RESs find out where generation assets are located. The closer assets are to your site, the lower your transmission and loss charges will be. To further address demand charges, 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.
Similarly, if your organization is considering an LSRE solution, due diligence must include reviewing congestion around transmission lines and ensuring use of high-voltage lines for maximum efficiency. Oversupply hurts project economics, driving market prices down and forcing generators to recoup their costs through higher rates.
The rest of your electric bill is comprised of distribution charges incurred while delivering energy to your buildings. Local utilities own distribution lines and charge distribution fees for use to cover the cost of maintaining the lines. Utilities also include riders, or pass-through charges, on your bill for items such as Renewable Portfolio Standards and lost revenue. State and local sales taxes are included here as well.
Taking Control of Distribution Charges
Distribution charges are the most difficult cost to contain, as they are decoupled from the price of generation and based only on how much electricity you use. These costs will (likely) continue rising regardless of coal or natural gas prices. Behind-the-meter optimizations (reducing consumption, storage, onsite renewables) are the only option available, and these solutions usually come with a very high price tag per MWh of avoided demand. Such options should be considered, but a well-structured LSRE solution often more than offsets rising distribution costs.