Understanding What Influences Electricity Cost
3 min readElectricity costs are influenced by a variety of complex factors, from fluctuating energy rates to a company’s consumption patterns. Knowing how these impact businesses is crucial to make informed decisions and manage operational expenses effectively.
Businesses should identify the various factors that affect electricity costs and build a strategy to help effectively manage them and optimize their cost structure.
Examining Electricity Price Components
The largest component of the overall cost of electricity is the energy supply. The energy portion of a monthly invoice can range from 35 to 70 percent of the overall cost depending on the location and type of business. Energy pricing is influenced by usage patterns, weather, and various state and federal regulations. Additional components that make up the total cost include capacity, transmission, ancillaries, passthrough charges for renewable portfolio standards and line losses.
Understanding these components and how they impact electricity bills can help businesses more effectively manage costs.
- Energy Supply: The cost of energy supply, influenced by usage patterns weather, and regulations, is the largest component of electricity costs, ranging from 35 to 70 percent. Effectively managing these costs can significantly reduce overall electricity expenses for businesses.
- Capacity: Capacity prices are determined by regional transmission organizations (RTOs) to support grid reliability and ensure that there is enough generation in the region to meet demand. In this way, businesses have reliable access to electricity, even during high-demand periods. Capacity prices are not always separated from energy supply in regions without an RTO.
- Transmission: Primarily composed of Network Integration Transmission Service (NITS) and transmission enhancement (TEAC) costs, these cover the expenses associated with transporting electricity from generation stations to electrical substations near demand centers. These costs are determined by utility-set rates and governed by the Federal Energy Regulatory Commission (FERC). Efficient transmission systems can help reduce these costs, but overall transmission expenses are influenced by infrastructure and regulatory policies, impacting business costs.
- Ancillaries: Small administrative charges billed by the RTO to operate the grid safely and reliably. Ancillary services are essential for maintaining grid stability and reliability. Ancillary services charges are not always separated from energy supply in regions without an RTO.
- Renewable Portfolio Standards (RPS): Some states have RPS programs, which are mandates requiring load-serving entities to purchase a certain amount of renewable energy. Compliance with RPS can impact electricity costs, as suppliers may need to invest in renewable energy projects or purchase renewable energy certificates. This can lead to higher costs in the short term but can provide long-term benefits for businesses.
- Line Losses: Costs included in the electricity price to compensate for the energy lost over transmission and distribution lines due to heating. These losses contribute to the overall electricity costs for businesses.
Building Your Energy Purchasing Strategy
As businesses build their energy purchasing strategies, it’s essential to consider a variety of product types, timing and decision-making processes. The complex process can be simplified through easy-to-use tools and a customized approach. Here are some key considerations to help develop an effective energy purchasing strategy:
- Control fluctuation in your energy price: Various product solutions can help manage and stabilize energy costs, protecting businesses from volatile market conditions and ensuring more predictable costs.
- Fix your rate or spread your risk: Businesses can decide to lock in energy rates at a single point in time or spread risk by making purchases over time, balancing stability and flexibility based on risk tolerance and market conditions.
- Make informed purchase decisions: Businesses can make purchase decisions or leverage automated algorithms, like Constellation’s MVP product, to remove guesswork and emotion from the process. These automated tools can provide data-driven insights and optimize purchasing strategies for better outcomes.
Choosing the Right Supplier
In competitive markets, one size does not fit all when it comes to developing a power purchasing strategy. It is important for companies to consider their unique usage profile, risk tolerance and budget goals. With the ability to choose their energy suppliers and negotiate contracts that best meet their needs, businesses have the flexibility to choose from various energy contracts, which differ in pricing models, contract length and additional services.
Evaluating these factors and their impact on utility bills can be time-consuming, costly and challenging. Working with a retail energy provider like Constellation can simplify the process from start to finish. Our team can provide insights, market knowledge and tools to help you identify the right energy solutions to optimize your energy purchasing and reduce your costs.
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