“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