Should You Consider Capacity and Transmission Pass-thrus for Your Business?

If your business exists inside PJM (Pennsylvania, New Jersey, Maryland, and 10 other states plus D.C.) and is not part of a co-op, there’s a good chance that someone at your company is in charge of procuring electricity supply from a third-party provider. The price for that supply is comprised of three primary components: Energy, Capacity, and Transmission. But the evidence is mounting to suggest that including the latter two components in your price is actually doing your business a disservice, and here’s why.

Energy

Energy is the actual cost of procured energy for each hour you use. It makes up more than half of your supply price and can be purchased on a forward market. By and large, the price of Energy to the PJM Western Hub has only gone down since 2010 (a few notable blips aside). Yet even as this downward price trend continues, end users are beginning to see their total supply prices increasing. Why? You can go ahead and point your finger at the other two components – Capacity and Transmission.

Capacity

Capacity is the cost of reserving power supply on the worst possible day of the year. When it’s 105 degrees out and you need twice as much power that day as usual, the generators need to be ready to deliver. There’s a cost for this, based both on the utility and each particular customer’s assigned tag (slice of the pie), which is updated every June 1^st.

Transmission

Transmission is the cost of moving power from generation facilities to the local utilities. As transmission (often called “NITS”) lines are upgraded, this cost creeps up more and more each year. Remote renewable sources becoming a larger player in the energy mix for the next decade will only continue to increase cost of NITS. Once again the price point is a mix of both the utility and the customer’s individual tag and is updated in most cases on January 1^st.

Not only are Capacity and Transmission costs increasing, they’re also becoming more dubious and therefore difficult to pack into an all-in fixed price. Reasons for this include:

Reduced usage during the COVID-19 pandemic leading suppliers to build in extra fat to cover Capacity and Transmission.
Delayed Capacity auctions due to disagreements between PJM and FERC about how to properly price in renewable sources. (In fact, any supplier offering a price after May 31, 2022 is just guessing at the Capacity cost and will true it up later.)
Constant mid-contract NITS increases adding extra line items to supposed fixed prices.
The gamesmanship known as Peak Shaving, where certain customers predict the five hours used to determine Capacity and NITS tags and reduce their usage so they don’t have to pay for them the following year. Granted the whole pie gets smaller, but customers who peak shave don’t pay for their share.

With all of these factors pushing Capacity and Transmission to about 40% of a total supply price and making them harder to fix, electricity buyers using at least 500,000 kWh annually should consider passing through Capacity and Transmission instead of locking in a traditional “all-in fixed price.” This means a buyer who is used to a price of 7 cents might now lock in 4.3 cents, but will have separate line items for Capacity and Transmission. By doing so, users can:

Avoid risk premiums in the price related to volume.
Avoid risk premiums in the price related to the unknown and impossible-to-hedge nature of Capacity and Transmission.
Pay less if their tags go down the following year (either through intentional Peak Shaving or sheer luck).
Gain better supplier participation since some are uncomfortable pricing all-in fixed, resulting in more options and lower pricing.
Pay the exact true cost of Capacity and Transmission for their account, as opposed to either the buyer or the supplier overpaying with an all-in fixed price.

If this sounds complicated, it doesn’t have to be! Your Shipley Energy account manager is here to help you assess your options and decide what Capacity and Transmission strategy is best for you. The all-in fixed approach may have made sense a decade ago, but so did a lot of things. We’re here to help you think differently, act strategically, and of course, save money.