When’s a fixed price not a fixed price? Answer: when it’s ComEd’s Price-to-Compare

Residential and small commercial customers still have the option of receiving electricity service from ComEd with a “fixed price.” Larger customers are in rate classes that have been declared competitive so their service option from ComEd is hourly pricing. The downside of hourly pricing is that you don’t know what price you are paying for electricity until after you’ve consumed it. This plays havoc with planning and budgeting as you can be rudely awakened by $1.90+/kWh electricity (such as what happened in the real time hourly market in the middle of the Polar Vortex earlier this month). As making one’s budget is paramount for facility managers, most of the larger customers secure their electricity supply through third party energy providers under a fixed rate option. That way they know the price they are paying. But what about the residential and small business customers who are on ComEd’s “fixed rate” – Do they really know what price they are paying?

ComEd’s Price-to-Compare

When evaluating electricity supply options beyond ComEd, it is suggested that the standard metric to employ is the utility’s Price-to-Compare.

From the ICC’s Plug In Illinois Website: (www.PlugInIllinois.org)

Price to Compare = Electric Supply Charge + Transmission Services Charge

ComEd’s Electric Supply Charge has summer and non-summer values. Thankfully, to simplify the math, the transmission charge is set annually. So if you or your community wants to compare an offer from a third party supplier they just add up the two charges, making some allocation of how much electricity used in the summer and non-summer months (which is information the average consumer doesn’t have readily available), to yield the Price-to-Compare. While that satisfies the above equation, it is only a Price-to-Compare in name only. It has very little relationship to the price you actually pay to ComEd for electricity supply.

Purchased Electricity Adjustment (PEA)

The IPA was established six years ago to protect smaller utility customers from market abuses in the purchase of wholesale electricity supply. The Illinois Power Agency purchases electricity for ComEd to resell to residential and small commercial customers. (ComEd is no longer in the electricity supply business and does not profit from the resale of electricity.) The IPA purchases blocks of power based upon what they project electricity demand will be for the coming period. If the IPA projects electrical load incorrectly, because customers either leave ComEd or the weather is hotter or colder than normal, power has to be either sold back into the market or more must be purchased. Invariably, there is some fund transfer with these transactions. This is where the PEA comes into play. Since the IPA and the utility can’t make or lose money on electricity transactions, the rate payers either pay more or less each month in an attempt to balance the IPA’s books. Since ComEd’s rates changed in June 2013, the price customers pay has varied from 5.011¢/kWh to 6.005¢/kWh – a price swing of almost 20%. How is anyone able to make an informed decision when your “fixed price” varies by almost 20%?

The Cost of Inaction

The process has been like this for three years, so why is it a problem today? In the past, third party savings for a municipality or an individual were several cents per kWh. With that magnitude of savings, a half cent swing in cost didn’t make much difference, and it surely didn’t determine whether you had savings of not. Some level of savings was assured. Now, with ComEd’s pricing being market based, and, therefore, more competitive with third party supply, the half-cent price swing can determine if savings are booked or not. But consumers want guarantees. Contracts are now being written by consultants to “eliminate” the possibility of getting into a contract where the electricity price is greater than ComEd’s delivered price. With millions of dollars at stake, litigating these contracts is going to be nirvana for lawyers as ComEd’s “price” comes into question. The current situation isn’t going to play out well for everyone. At minimum, there will be lost opportunities as some communities and individuals stay with a more expensive utility supply option because they are confused or scared by the price risk that is unnecessarily shouldered by the customer.

Proposed Solution

The energy supply product to solve this problem is simple and has been utilized since retail open access of electricity came to Illinois in October 1999. It’s a fixed rate, load-following product. No matter how much electricity the customer uses, the utility, by way of their supplier(s), sells electricity at a fixed price for that annual contract period (i.e., the supplier assumes all weather risk). A short annual open-enrollment period for utility supply, coupled with an early termination fee for those choosing to leave during the year for third party supply, will eliminate the need for any adjustments such as the PEA.

Simple Solution; Difficult Implementation?

When the Illinois Attorney General’s office noted that power was being procured in a manner that put residents and small business at risk, they stepped in and got things changed – the IPA was established and the procurement process was developed. Unfortunately, as shown above, the process needs to be fine-tuned. Now is the time to act before this round of power is purchased.

The IPA will be going out soon for electricity supply for the post-June 2014 period. If things are going to change, now is the time. Contact the AG’s office and share your views and have your voice heard.

Energy NewsFlash — Price to Compare

“What Happened? I thought hourly pricing was supposed to be cheaper!”

Polar Vortex is a Game Changer

We’re from Chicago. We can take the cold. When the Polar Vortex settled over the Midwest last week, yeah we were cold – but we play football OUTSIDE in that kind of weather. We’re Ditka-tough in the “City that Works.” We complained a bit and bundled up – but then we went on and did what needed to get done. And now, a week later, with the current heat wave rolling over the area (20F with a stiff breeze), we can look back and assess what else was affected by the cold. Unfortunately, some utility budgets may have been left in the Polar Vortex’s wake.

Winter Electric Demand

Chicago is one of the few northern cities that has many buildings heated by electricity. The purpose of using electric heating was to even out the annual electric demand for the region so the many nuclear plants could be deemed “used and useful” by the Illinois Commerce Commission (which then allowed ComEd to be paid for their investment). With electric heat, when the temperature goes down, electrical demand goes up. And with the increased demand comes higher prices in the real time market (i.e., hourly). For everyone on hourly pricing, the higher price experienced last week was bad enough. But for those on hourly with electric heat, a multiplier effect is in place as your cost is a function of both price and consumption. Another hourly electrical service that didn’t fare well was dusk-to-dawn street lighting. The long, dark winter hours (approximating 16 hours per day) shift a disproportionate amount of the annual lighting load to the winter months resulting in a very expensive January. In case you were wondering, that sucking sound you heard wasn’t the Polar Vortex moving east, but rather your energy budget going down the drain. For many it was a short lived “Happy New Year.”

How bad were hourly prices?

The two really cold days were January 6th and January 7th. The hourly price peaked during this period peaked on 8:00 AM January 7th at $1.93/kWh – about 60 times the historic price.

Doing some quick calcs for hourly customers using electric heat indicate that as much as 30% of the annual heating budget could have been consumed over a three day period. And for street lighting the increased price for the three days equates to paying more than an additional month of electrical service. Not a good way to start off the year.

So what can you do to avoid this problem in the future?

The first thing you should do is determine if you should be on hourly pricing or not. If you have no ability to shift or curtail load in times of high prices, you shouldn’t be on hourly pricing. Also, if you don’t have sufficient resources to monitor hourly prices (so you aren’t blind-sided by a steep run-up in hourly price), you shouldn’t be on hourly. Hourly pricing is not for everyone. If you can’t shift load, opt for some form of fixed rate.

If you decide you are a candidate for hourly pricing, to minimize your exposure you should opt for block and index over just hourly pricing. With part of your load on a fixed block price fewer kilowatt-hours are exposed to the highest rates. The downside is that by purchasing a block, you limit your potential of paying a lower overall price – there is no free lunch. You can also investigate purchasing some call options that would limit the maximum you would pay for electricity during any hour. Again, purchasing options will increase your overall cost.

If you want to limit your risk on the operations side, you can participate in some third party service that helps you shift load. Some of the curtailment providers can assist you, but if you really want to be on hourly pricing and dynamically control your building, taking advantage of every pricing opportunity (and avoiding pricing pitfalls), consider QCoefficient . They’ve won many awards for utilizing building thermal storage for shifting electrical load.

Fixed Rate Contracts

The advantage of an hourly contract is that it is cheaper than a fixed rate contract. And a fixed rate contract should be more expensive – someone else is assuming the load-following/weather risk. But what is the premium end users typically pay for offloading this risk? And is it worth it? If you look at data over a long period of time (multiple years), the fixed rate premium is about $2/mWh. That’s about 5% of the cost of the energy component alone – not a large cost for a good night’s sleep.

If you are ready to swear off hourly pricing and switch to a fixed rate, make sure the terms and conditions don’t expose you to balancing risk as this is the risk you are trying hard to avoid. Look hard at the terms and conditions. If a supplier is saddled with some large unexpected balancing charges, they could be looking for ways to pass them on to their customers. Just don’t let it be you.

Take a few steps back and assess your situation to see if hourly pricing is right for you. Spend some time determining which supply product fits your needs. Then implement a thorough and well thought out procurement process that takes advantage of some of the many opportunities to drive your cost down (e.g., online reverse auction). Then sit back and enjoy Chicago’s weather.

Energy NewsFlash — Polar Vortex