Line Losses: Overlooked and Often Misunderstood
Do you know how your energy costs are determined?
Understanding what’s in your commercial energy bill is an important part of being an educated consumer, but it’s not something most of us are taught.
Energy cost is comprised of three primary components:
- Generation (the production of energy by power plants)
- Transmission (the bulk transfer of energy over long distances at high voltages via interconnected lines that form a network, or the grid)
- Distribution (lines, poles and transformers owned by utility companies or independent entities that distribute energy over shorter distances, from regional transmission operators to homes and businesses)
As a consumer, your business pays for high voltage wires (transmission) and local wires (distribution). Naturally, the transfer of electrical energy between power plants, substations and customers is impossible without some energy loss.
The Energy Information Administration estimates about 5 percent is lost nationally each year in transmission and distribution, most of which is in distribution.1
The quantity that is lost during transmission and distribution of electricity across the electric grid is referred to as a line loss. Because the utility provider must purchase enough energy to cover your estimated consumption (including line loss amount), this loss gets divided and passed on to customers.
The way in which your energy supplier includes line losses in their pricing and in contracts can vary so it’s important to ask about to determine the lowest impact on your energy bill.
Line Losses on Fixed, Index and Flexible Power Plans
Constellation’s standard fixed price solutions include line losses in the contract rate and are not charged separately. Suppliers do not typically pass through line losses to customers on a standard fixed price contract.
When it comes to our index price solutions, line losses on energy components (i.e., power) are passed through whereas non-energy components (these vary depending on your ISO/RTO, such as ancillaries, capacity and transmission costs) are fixed within the standard index adder contract.
Our flexible index solutions allow a customer to buy power with a blended strategy of fixed and index pricing. Line losses are passed through at an index rate whereas line losses associated with retail trade transaction rate (RTT) are passed through at the fixed RTT rate.
But, line losses aren’t always so black and white, such as in the PJM region, which is comprised of 13 states and the District of Columbia.
Understanding Deration in the PJM Market
Deration is a component of line losses in PJM. Loss deration factors represent total transmission losses divided by total load including losses. Deration typically accounts for 1-2% of energy market values, or about $0.30-$0.70 per MWh.2
It’s important to ask your energy supplier how they account for deration on any index pricing in PJM – whether they account for deration upfront by offering you a reduced index adder price or whether they plan to pass it through in the form of a lower line loss rate on the bill. (Because deration is often handled differently by suppliers, understanding these differences is also key to accurately comparing offers.)
Currently, Constellation’s standard index solutions in PJM passes deration through to the customer by billing customers a reduced line loss rate (rather than the higher utility-published values). In other words, customers see the reduction on the back-end on their bill, rather than on the front-end in their contract price. That means that the contract price may be $0.30-$0.70 per MWh higher than an equivalent offer that accounts for deration upfront within the contract price, but then calculates bills using the higher loss rate.
To learn more about the hidden costs of line losses, watch our webinar video.