Energy Economy 101

Understanding energy economics makes you a better consumer. Any analysis requires specific and detailed knowledge of the applicable economic factors. Most organizations will be evaluating cost reduction and supplier options. Others will be in a position to realize energy related revenue opportunities.

Energy Bills

Demand Charges

Energy or Commodity Charges

Reactive Charges

Riders

Energy Bills

Deregulation will require Electric Distribution Company's to unbundle their rates. Generation is the only component being opened up to competition. The tariffs and bills will change but energy charges will still be calculated using these allocation parameters.

The invoice you receive for your organizations energy usage is the result of lengthy and complicated language spelled out in the tariffs filed by you local distribution company. Being able to itemize these energy charges and understand how the total charges are calculated is important. Attempts to shop for a supplier or reduce energy costs without this information is as logical as firing the gun without taking aim.

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Demand Charges

Your local electrical distribution company runs the ultimate just-in-time delivery system. No need to place an order; just flip a switch. However, this flexibility does have an associated cost. The utility must have the generation, transmission and distribution capacity capable of supplying all your energy requirements. Sometimes refereed to as penalties: demand charges are not penalties. They are legitimate costs associated with energy delivery.

Demand charges are typically based on the maximum average power usage over some interval of time. Thirty minutes is the most common interval, but they vary by utility. The maximum is set during the course of the billing cycle, thirty days usually, then reset after the meter is read. Charges are levied on a $ per kW or $ per kVA basis. The demand or capacity charges are sometimes hidden in the kWh charges as well. Refereed to as "hour-charges" kWh rates are often tiered by language such as:

6.00 cents for the first 200 kWh per kW demand

4.3 cents for the next 200 kWh per kW demand

3.28 cents for all excess

This language will push more kWh into the higher tiers as the demand increases for the same total kWh consumption.

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Energy or Commodity Charges

In its simplest form, the energy charge is levied in cents per kilo-watt hour. There are typically two to four tiers for commercial and industrial customers. The tiers generally start high and drop down as the total number of kWh grows.

The most important item to understand about the energy charge is that sometimes the demand component can push more kWh into the more expensive tiers. This provides a double benefit from reducing demand. See the description above under Demand Charge for an example.

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Reactive Charges

You'll be spared the full technical description. The reason customers are charged for reactive energy consumption is the opportunity cost. For every kVar-hour the utility needs to provide is one kWh that they can't sell. They need to charge for that lost opportunity.

Utilities typically charge for reactive energy by some formula involving kVar-hours, kWh and demand. The results of the formula yield the billing reactive demand. This reactive billing demand is multiplied by the charge.

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Riders

Riders or applicable clauses held outside of the filed tariff add to costs of energy. The applied riders for a particular customer are listed on the tariff. Typical riders are:

1. PIP - charges
2. Fuel charges
3. Primary voltage discount
4. Substation discount
5. Primary meter discount
6. Off peak forgiveness

PIP - PIP or percentage of income payments is a program offered to residential accounts who are having trouble paying their bill. The charge collected in this rider recovers the forgone revenue by the utility. It is paid by all customers not on the plan. This program allows them to pay a percentage of the income to keep the heat and lights on.

Fuel Charge - The fuel charge for power changes periodically and is based on a very complicated formula. This formula takes into account the variability in the fuel supply and the associated efficiencies of the generation portfolio. Fuel charge adjustment riders will disappear as a result of competition. The market will dictate what suppliers can get for fuel not formulae.

Primary Voltage Discount - If you take power from overhead primary voltages, typically 23kV or greater, you'll get a discount in the neighborhood of 2%.

Substation Discount - The substation discount is available to customers that have installed and maintain their own substation equipment. Not all local distribution companies provide the secondary transformation as a normal course of business. This discount, of course, is not available within those service region as it does not apply.

Primary Metering - Customers that receive secondary service but are metered on the primary of the transformation are paying for the losses of the transformation. This entitles those customers to a primary meter discount.

Off peak forgiveness... maybe. Good business... definitely. We all understand the demand constraints on the generation infrastructure. Offering a discount on off-peak usage is the best way to encourage consumers to consider shifting energy consumption to off-peak times. The competitive market place will increase the incentive for users shopping for alternative suppliers with better off-peak discounts.

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