There are several costs that make up a fixed all-inclusive electricity price. The largest cost, making up roughly 80% of an electricity price, is the cost of the actual energy supply. The second largest cost component is from capacity charges. Capacity is essentially the insurance of having adequate electric supply available during peak demand hours on the electric system. Without capacity costs, the risk of brownouts and blackouts would be much higher.
In competitive electric markets such as New England, New York and PJM, the Independent System Operator is responsible for paying generators for their capacity to perform during critical hours. Simply, electric generators are paid to guarantee that there will be enough electric supply available to meet forecasted demand requirements into the future. These costs are pre-determined using competitive auctions. Due to planned electricity generation plant closures and growing demands, future capacity costs are increasing. While the actual cost of the capacity is determined system-wide, your individual capacity tag is established by your electricity demand when the system is peaking . A consumer’s capacity tag is tied to the number of capacity units that the consumer will require on the peak demand day of the year.
In New England, capacity tags, or capacity obligations, are established during the peak hour during the prior year. The capacity year is defined as June 1-May 31. For example, a consumer’s capacity tag from the period of 6/1/14-5/31/15, was established during the peak demand hour during the time period of 1/1/13-12/31/13.
As capacity costs are becoming more expensive– with some areas seeing over a 300% increase within the next two years – the benefit of understanding and managing the capacity tag is growing in importance. By effectively predicting the potential peak day, consumers can reduce their electricity usage on that day to reduce their capacity tag for the next capacity year. A reduction in the capacity tag will help mitigate the increase in the capacity cost going forward.
Usource assists clients in developing a tailored and customized capacity tag management program as part of a comprehensive energy strategy. Consult your Usource Energy Advisor today to learn how we can help you to better understand the implications of an escalating capacity market and plan accordingly.
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