Energy Management

Understanding Electricity Transmission

Fundamentals of Electricity Choice
3 min read

Transmission Rates and Costs

In competitive electricity markets, the final price businesses pay for power includes more than just the cost of energy generation. Transmission and distribution costs can make up a significant portion of the final electricity bill. In this Electricity 101 series, we’re breaking down key aspects of purchasing power. This includes transmission: what it is, how rates and costs are determined, and options for business customers in deregulated markets.

What is Electricity Transmission?

Transmission refers to the high-voltage bulk transfer of electrical power from generating power plants to electrical substations near demand centers. The U.S. electric transmission system consists of over 200,000 miles of high-voltage transmission lines and towers that deliver electricity nearly instantaneously across regions. These transmission lines, when interconnected with each other, form regional networks referred to as “power grids” or simply “the grid.”

The transmission grid is different from local power distribution, which refers to the lower voltage wiring from high-voltage substations to customers. Transmission infrastructure may be owned, operated and maintained by electric utilities or independent transmission owners. Regional transmission organizations like PJM in the Midwest/Mid-Atlantic, California ISO, New York ISO and Electric Reliability Council of Texas (ERCOT) coordinate operations and pricing across multiple states.

Transmission pricing varies across different regions of the U.S. power grid. To manage grid traffic, standardize access, ensure reliability, and control management across the regions, the Federal Energy Regulatory Commission (FERC) helped set up nonprofit Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) beginning in the late 1990s. While RTOs span larger multi-state areas, ISOs tend to serve individual states.

How are Transmission Rates and Costs Set?

Within RTO and ISO territories, transmission line owners can make returns on their infrastructure investments through rates and annual charges to power suppliers and consumers based on budgeting methods. These charges proposed by the transmission owners must be approved by the FERC to ensure fair competition and reasonable rates.

While the exact charges and rate structures vary by RTO and ISO across regions, common costs include infrastructure investment cost recovery, new project development costs, reliability service fees and grid loss charges. Driven by aging infrastructure, new generation and changing demand, transmission rates within most U.S. RTO and ISO regions have steadily risen.

How are Transmission Costs Calculated?

For business customers, transmission costs are typically demand-based charges influenced by their peak usage. Regional transmission operators track the capacity each business requires using metrics like the billing demand.

If a customer has a fixed-rate electricity supply contract per MWh, the formula for estimating monthly transmission costs bases the rates on the business’ peak demand allotment, applicable regional rates, and days in the billing cycle. This total cost is then divided by estimated total energy usage to incorporate into the per MWh unit price. This final calculation ties transmission costs to peak capacity demand.

Transmission Management Options for Businesses

In deregulated electricity markets, businesses have more options to control transmission costs and risk exposure.

Major types of transmission rate products include:

Fixed Transmission – Locks in the transmission price for the contract term, maximizing budget certainty with the lowest amount of risk.

Transmission Price Adjust – Transmission prices are fixed at the time of contract, but subsequent incremental changes from the grid operator are passed through based on capacity volume (typically updated annually). This could result in a credit or an additional charge.

Transmission Cost Adjust – Transmission prices are fixed at the time of contract, but any incremental changes to your usage volumes and monthly demand charges are passed through at the transmission rate at the time they are adjusted (typically updated annually). This could result in a credit or an additional charge.

Pass-Through Rate – Businesses pay their actual transmission costs based on usage and changing rates published by the grid operator. They are billed for precise costs – no more and no less – which provides flexibility but less predictable bills.

As transmission operators adjust underlying rates, costs can fluctuate for businesses using variable rate options, even with consistent or decreasing electricity usage. Likewise, changes in a business’ peak demand could alter transmission costs for non-fixed rate structures. Monitoring these potential demand charge and rate change impacts is essential for transmission cost management with adjustable plans.

Work with Constellation Energy Experts

Navigating market changes and evaluating their impacts can be challenging for organizations. With decades of electricity market experience, Constellation’s energy experts can help determine the optimal transmission management strategies for your business based on financial goals, capacity needs, risk tolerance, and other individual priorities. Contact us today to learn how Constellation can simplify transmission purchasing for your business.


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