The Basics of Buying Electricity

The Basics of Buying Electricity

By Becky Thompson

As an energy decision maker, you likely get multiple calls a day from brokers and suppliers promising big savings on your energy bills. But before you jump into an energy supply contract, you should have a firm understanding of what you’re signing up for and your options for buying electricity.

Let’s take a step back to talk about how electricity is delivered to your facility. Then we’ll discuss which electric components you can control. Finally, we’ll talk about how factors such as risk tolerance and budget stability can help you determine which product is best for your business model.

The Path from Generation to Delivery

How generated electricity gets delivered to your facility

Supply

“Supply” is the electric energy you use to charge your phone and turn on your lights. A generator uses raw materials (such as coal) to produce the electrical current that is delivered to your facility.

Transmission

“Transmission” costs include:

  • Capacity
  • Transmission
  • Ancillaries, and
  • Losses.

These non-supply components of your bill move the electric energy from the generator to your facility via power lines. These costs are typically fixed rates regulated by the Federal Energy Regulatory Commission (FERC) and your local utility.

Delivery

“Delivery” charges, which include taxes and other distribution charges, are state regulated and passed through from your local utility.

Which Electric Components Can You Manage?

Components of Electric Cost

Energy

Electrical energy (supply) makes up about 50% of your fixable costs. In a deregulated energy market, this is where you have the most control and can have the greatest impact with the proper strategy.

Capacity and Transmission

Capacity and transmission are known as “demand charges.”

  • Capacity is the cost associated with reserving generation space on the grid.
  • Transmission is the cost of transporting the electrical energy from the generation point to the utility.

These charges are determined based on the peak load contribution (PLC) of each of your utility account numbers. Demand charges total almost 40% of your energy cost, so knowing how you can influence your PLCs can help reduce your costs.

Ancillaries and Losses

Ancillaries and losses make up the remaining 10% of your electricity charges.

  • Ancillaries are the administrative costs of supporting transmission services.
  • Losses are the costs for energy lost during transmission.

You can lower your costs for capacity, transmission, ancillaries, and losses with a proper demand-side management strategy.

Although FERC regulates these four components, the rates for these pieces vary based on the supplier you choose and how they allocate hedging risks. Fixing any or all of them as part of your supply rate affects your budget certainty.

A Note on Delivery Charges

Delivery (utility) charges are the same regardless of your energy supplier and cannot be fixed.

Which Components Should You Lock?

If you’re looking for budget certainty, a fixed “all-in” product that locks both supply and non-supply components is the way to go. A pass-through product is better if you’re working on an efficiency project or want to actively reduce your demand charges. Components not locked are passed through at monthly market rates.

Work with an Energy Advisor.

Knowing which components you can influence can help you choose the product that best matches your needs. A broker can bring you multiple prices, but it’s all in vain if it’s for the wrong product and strategy.

An energy advisor takes a holistic approach to your energy — guiding you through the energy purchasing process and giving you peace of mind that you have a strategy that’s right for your facility. Give me a call to discuss if your current energy product is right for you.

 

About the Author

Becky is a Senior Strategic Energy Advisor specializing in the public sector,  including schools and municipalities. She has been in the energy industry for over five years, working from the ground up as an account manager and then as an electric pricing team lead. Her background knowledge of the inner workings of an energy company helps identify actionable strategies for making her clients’ energy both easy and cost-effective. In her free time, Becky enjoys any activity that requires being outside and making her son belly laugh.

Becky can be reached via email at bthompson@naniaenergy.com or phone at (630) 225-4561.

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