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“Capacity” is the total amount of electricity resources available to cover demand during peak times. In other words, when I turn on the switch, will the electric company have enough power for the light to go on?

The utilities in Ohio (AEP, DP&L, Duke and First Energy) are part of a Regional Transmission Organization that covers a total of 14 states (Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia) that is called the “PJM” – which are initials for Pennsylvania, Jersey and Maryland (Ohio and the other states apparently didn’t make the cut). The PJM’s primary responsibility is to assure that there is sufficient electricity to meet the peak demand in the region. To meet this responsibility, the PJM conducts an annual auction that determines the rate per megawatt hour that electricity generators are paid to provide electricity during the peak demand times.

For a number of years, the Capacity charges have remained a relatively modest percentage of the total utility bill. Unfortunately, in recent years, the auction has produced numbers that have skyrocketed as both a direct cost and percentage of the consumers’ electric bills.

Due to a number of variables, Capacity charges can vary from utility to utility and from year to year. For example, on June 1, 2014 the price of Capacity increased approximately 400% from the pricing of June 1, 2013 to May 31, 2014. Unfortunately, Capacity charges will be a continued significant portion of the electric bill for the coming four years.

Recently, fellow Ohio Manufacturers’ Association Energy Committee member Go Sustainable Energy, LLC presented the chart below that illustrates the impact of Capacity charges in the Duke Energy and First Energy footprints (AEP and DP&L are similar to Duke). Highlighted is an electricity consumer that uses 10 million kilowatt hours of electricity a year. Until June 1st of this year, the annual Capacity cost in Duke and First Energy was $18,219. This year, the Capacity charge jumps to $82,775. These numbers get really scary starting June 1, 2015 when the rate jumps to $89,352 in Duke and $234,549 in First Energy.

 

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WHY IS THIS HAPPENING TO THE ELECTRICITY CONSUMER?

In 2009 and 2010, the downturn in the economy lowered electric demand which brought lower prices for Capacity charges for 2012 – 2014 delivery years. As the Obama Administration’s environmental regulations began to affect the ability of coal fired electric generators, there were a number of plants that were announced to be closing. Hitting First Energy more acutely than other utilities, they announced the retirement of some plants in northern Ohio and Pennsylvania. As a result, the First Energy footprint was deemed to be a “constrained zone” where power must be imported across congested transmission lines from other zones to meet peak demand, which caused the dramatic increase in the 2015 – 2016 years.

First Energy later reversed these plant closings which caused the Capacity pricing to drop for the 2015 – 2016 delivery years. Unfortunately, the likely upcoming enforcement of additional environmental regulations has caused the price of Capacity to jump in the latest auction for the 2016 – 2017 delivery years. The PJM is faced with the highest number of coal-fired electricity generating plants closing in the history of electricity in calendar year 2015, which has caused Capacity and electric costs to remain elevated.

Simply put, the demand for electricity has remained the same and the supply to meet the demand is dropping.

As the prices increase, a number of policy makers have begun to examine the dramatic increase in costs, the polices of the PJM and activities of the electricity generators, and have raised concerns that even with all of the pain being inflicted on the power consumer, PJM is not meeting its responsibility to assure a sufficient electric supply during peak demand (think back to the Polar Vortex earlier this year when threats of brown outs and black outs were discussed).

Unfortunately, increased Capacity costs are going to be our painful companion for at least the next four years.

Faced with crushing upcoming costs, a number of our clients are asking, what can be done to lessen the impact?

In our next column, we will discuss methods to reduce or smooth the impact of Capacity charges as a portion of your electric costs.

Fred Graft is President of Worthington Energy Consultants, a highly regarded energy consulting firm that provides its services to government, charities, religious institutions, health care, industrial, commercial, agricultural, educational, retail and hospitality clients.  fgraft@worthingtonenergyconsultants.com

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