The energy price volatility that is taking place today has commercial and industrial business leaders exploring ways to lower energy costs. A commercial electricity price is influenced by several factors. There are conditions that cannot be controlled, such as weather and fundamental market conditions, and there are elements that can be controlled. In this blog, we discuss two costs on your energy bill, beyond commodity rate, that can help you lower commercial energy costs.

How and when you use energy can have a positive impact on other lesser-known charges such as transmission and capacity costs. Capacity is essentially the insurance of having adequate electric supply available during peak demand hours on the electric system. Transmission costs are the fees associated with moving electricity through the grid.

In competitive electric markets such as New England, New York, Texas and the 13 states included in PJM, both capacity and transmission charges can be reduced through management tactics. Lowering these two costs can have a significant impact on your monthly and annual energy spend.
 

About transmission costs

There has been a lot of recent movement in transmission costs within regions of PJM. This year, the capacity auction that was originally slated for January 25, 2022 was moved to May 1, 2022. In addition, the Federal Energy Regulatory Commission (FERC) is reverting to the previous market design for the May 1, 2022 auction; a backward-looking Net Energy & Ancillary Services Revenue Offset rather than forward-looking. The result could lead to an increase in charges to end-users. The extent of these changes is currently unknown.

In PJM, the mechanism that transmission owners use to recover their annual transmission costs, and revenue requirements from PJM customers, is called Network Integration Transmission Service (NITS).  NITS charges can change as costs associated with operation and maintenance, tax, cost of capital or rate base, and transmission owner cost of services fluctuate.
 

How transmission costs are calculated

Each local distribution company within PJM has a network transmission service peak load contribution (PLC) requirement. Like capacity tag costs, NITS (and Transmission Enhancement Charges) are calculated based on a customer’s peak-load demand and are referred to as the Transmission Tag, or Transmission PLC. The transmission tag uses the following formula:

How capacity charges are calculated

The capacity charge is one cost that can be affected by proper management. Your capacity charge is made up of two main components: capacity cost and capacity tag.

Capacity cost: The generation price set per kilowatt-hour

Capacity tag: The total kilowatt-hours used by a facility on the peak hour(s) of the peak day(s)

What you can do to reduce costs

There are ways that commercial customers can take action to reduce and control transmission and capacity costs. Depending on your risk budget tolerance, it may make sense for you to “pass through” these costs so that you can manage them through demand reduction measures to obtain lower tags. By effectively predicting the potential peak day(s), companies can temporarily reduce their electricity usage to lower their tags for the next capacity year. A reduction in the transmission and capacity tag will help mitigate the increase in the costs going forward and generate savings.