ISO-NE Reserve Margin Pass-Through Costs

This month, New England clients may see increased charges on their electric supply bills. The increases in charges are a result of the Independent System Operator – New England (ISO-NE) adjustments to capacity reserves. You may recall from discussions with your Usource advisor that in order to ensure adequate generation capacity is available to meet the peak demand on the region’s electric grid, the ISO incentivizes generators to have capacity ready to go. As part of the that planning, the ISO builds in a cushion known as Reserve Margin to ensure that the lights stay on even if really hot weather is stressing the system. The ISO is planning for future events, so the actual Reserve Margin may be different from the planned one. Lately, the increase in solar power and demand response has decreased the peak demand requirements more than the ISO planned.  As a result, the ISO is paying for capacity that is not needed and these costs need to be reallocated back to the users of the system who benefit from the reliability. These cost increases are charged to the electricity suppliers and can then be passed through to the end users. Whether or not a supplier decides to pass through those charges to end users is dependent on how they originally priced your electricity supply, i.e., what did they assume for capacity costs and what kind of premium did they build into their original price to manage potential changes in costs. Most contracts have some mechanism, like Change in Law, to allow suppliers to pass through  unanticipated costs.

Change in Law clauses are a necessary part of energy contracting. In most energy contracting options, suppliers are fixing all or some components of your energy price. In order to do that effectively and profitably, suppliers must hedge the risks that could cause the cost of your energy to increase. At the same time, policy makers are actively shaping the electricity markets, in particular to move towards zero carbon solutions and to maintain reliability. Future regulatory and policy changes are unknown but can have a significant impact on future energy costs. In order for consumers to get simplified products to hedge their energy price risk at reasonable rates, there needs to be Change in Law language in contracts.

That said, not all Change in Law clauses are the same. Some suppliers will have relatively broad Change in Law language in their contracts and take a relatively liberal interpretation of what changes constitute Change in Law. With these suppliers, you might see more aggressive upfront price offers, but know that the risk that future charges could be passed through is greater than with suppliers that have narrow Change in Law language. With customers contracting for longer terms in markets where  active policy making is the norm, customers should anticipate Change in Law pass through charges regardless of supplier.

All of our clients in all market areas need to be aware of Change in Law. Usource experts are ready to answer your questions about the Reserve Margin changes in New England or more generally how Change in Law can impact your price .

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