What Factors Impact Electricity Transmission and Distribution Costs?

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). Upgrades made to improve the reliability of a transmission grid, such as PJM, which serves 13 states, ultimately impact the price we pay for electricity. Since, the PJM Interconnection Board has approved more than $8 billion in transmission upgrades to connect new generating facilities and improve reliability.

This has left many in the Northeast and Mid-Atlantic regions served by PJM wondering how these upgrades could impact what they pay for electricity. Here are three of the most common factors that impact electricity transmission and distribution costs.

1. Line Losses

Naturally, the transfer of electrical energy between power plants, substations and customers is impossible without some energy loss. The Energy Information Administration estimates about 94megawatts of every 100megawatts is delivered to the end user and about 6 percent is lost nationally each year in transmission and distribution, most of which is in distribution.

The gap is referred to as the 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.

2. Transmission Rates

Transmission rates encompass the cost of providing transmission service and reflect each individual transmission owner’s investment in the transmission infrastructure to yield a return. The Federal Energy Regulatory Commission (FERC) determines these costs. The Regional Transmission Organization (RTO) may bill these rates to local utilities, which then pass them on to either the customer or the customer’s electric supplier.

Customers have several options for managing transmission rates. They can choose a plan that allows them to purchase all or a portion their energy at a fixed price—including transmission, capacity and ancillary costs—or they can pass those costs through.

Constellation offers a variety of pricing plans, including Fixed Pricing, Index Pricing or Index Plus Block. With Index Plus Block pricing, you can fix a certain volume of your energy usage at a specific rate and also choose to lock in transmission costs and other unforeseen expenses.

3. Transmission Upgrades

Transmission upgrades are the building of new transmissions. The cost of transmission upgrades is passed on to load-serving entities in each zone.  This cost is divided up between all customers in each zone generally in proportion to their usage.

In short — while some factors (like transmission) fall outside your control as a buyer, you can still guard against rising costs by locking in rates and continually working to reduce consumption.

With transmission costs expected to rise, Constellation’s pricing solutions can help you stay in control of your electric bill. Our energy management experts can help you determine how much of your usage you should lock in at a fixed rate, what portion you should buy on the market and when it makes the most sense to purchase it to guard against volatile market prices.

To learn more about our solutions for managing energy prices and controlling energy consumption, request a quote today.