3 Tips for Navigating a New England Energy Contract
Navigating an electricity contract is like driving through downtown Boston. The streets are narrow, construction zones litter the city and your GPS is easily compromised by detours and unexpected closures.
If you don’t pay close attention to the signals and signs around you, you are bound for an unexpected outcome – one that can cost you time and frustration.
Did you know that ‘detours’ such as regulatory changes, newly implemented renewable programs and annual cost fluctuations in the existing market structure can influence your energy contract? These deviations can lead customers and suppliers alike to look for ways to manage these costs properly to avoid budget uncertainty.
Here are 3 tips to help New Englanders stay ‘on course’ when navigating their energy contracts:
Know Your One-Way Streets
Understand the risks present in your market and which party wears that risk in your contract. Ask your supplier or broker whether the risk is shared, or entirely yours. You should also understand whether there is an increased value if you take the risk upfront or further down the road if certain conditions materialize.
Tip: Always ask yourself, what is the reward for taking on an increased contractual risk? Once your risk is assumed, it can be difficult to turn around—so make sure you navigate these tricky ‘one-way streets’ appropriately.
Avoid These 3 Budget-Breaking Potholes
Has your supplier or advisor explained the structure of your state’s Renewable Portfolio Standard (RPS)? This is especially relevant in Massachusetts, as the Department of Energy Resources (DOER) has continuously supported clean energy efforts through multiple provisions that impact supply costs.
For instance, the RPS Solar Carve-Out is designed to facilitate the development of solar photovoltaic (PV) energy, according to the DOER. Provisions within this program include annual auctions that dictate cost obligations that can represent approximately 20% of the total supply cost for a typical commercial industrial load.
Tip: Having a basic understanding of these RPS programs—specifically, the timing of auctions and how risk may either be mitigated or passed through to you after contract execution—is the key to managing this risk.
The second ‘pothole’ you should know about is the Forward Capacity Market (FCM). ISO-NE has FCM that is designed to ensure the system has enough generating resources to meet demand three years in advance of the fiscal power year.
Reserve margin (RM) is a factor of adjustment to account for differences in actual peak load as compared to the capacity that was sold in a given FCM. The RM operates as a buffer, essentially keeping generator payments whole for the commitment period if peak load should decline. Think of capacity as insurance for uninterruptable power to be available at all times, even if not needed.
Despite ISO-NE having an FCM, which might indicate price stability for the known auction periods, capacity costs created a significant amount of volatility over the past year. This was due to (1) an increase in the FCM compared to years prior and (2) differences in valuation of RM across the market.
Tip: The more you understand about capacity price formation, the better positioned you are to navigate the often-hidden contractual risks related to these costs. A typical commercial industrial load can have Capacity Costs in excess of 35% of total supply cost, for instance.
The final ‘pothole,’ and arguably the most controversial, is material change/change-in-law language. These sections of your energy contract can be the difference between budget security and budget disarray.
A material change clause protects the supplier from fundamental changes in a customer’s energy consumption. If a customer departs from its forecasted consumption over a period of time, the application of the material change clause may result in an updated rate or increased costs charged for energy.
It is also important to understand how material change is defined in your contract. A material change may be triggered by a formal legislative/regulatory/governing body process or it may be based on market changes, underlying costs or increased costs to your supplier to serve you as a customer. Should any of these events occur, you will want to understand the impact of the material change clause in your contract.
Tip: While there is no material change clause in Constellation’s current standard power contract, it is important to ask your supplier or broker 1) if the contract contains a material change clause and 2) does the material change clause have an established swing tolerance for consumption and the length the change must occur. You should also review change in law provisions carefully.
All GPS Systems are Not Created Equal
It is fair to assume that at one time or another, we have put ourselves at the mercy of a GPS to lead us somewhere. If this is true, then like me, you’ve probably ended up somewhere you didn’t intend.
Like your energy supplier, a GPS needs to stay current with the maps, traffic, construction, accidents and anything else that could impede you from arriving at your destination on time and without surprises. Choosing an energy supplier to help you navigate an increasingly complex energy environment is not only important—it is imperative if you want to arrive at your destination safely, on-time, and in this case on-budget.
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McKay joined Constellation in 2012 as part of the acquisition of Integrys Energy Services, Inc., and is currently working as a Business Development Manager. His 12 years of experience in the energy industry is currently being applied to the strategic facilitation of channel partner growth in the Northeast region of the United States.