Why do electricity and gas contracts have early termination fees?

Many people ask why electricity and gas contracts have early termination fees?  There is a very good reason.  First look at it from this perspective:  the energy supplier is guaranteeing that your contracted price will never rise, no matter what, even if a disaster strikes the energy supply infrastructure.  They are protecting themselves with a financial instrument that requires that you buy the agreed amount of energy during your contract term.  If you don’t…as in early termination…they still have a financial obligation to make good on using that energy.  Would it be fair, from a purely ethical perspective, to walk away from that transaction?  If prices in the market go down slightly and you find your contract price a bit higher, remember: you are protected from price increases for the term of the contract.  You will also find that over the entire life of the contract, you will likely come out ahead and save money.  Another analogy I like to use:  if you pay $10,000/year for fire insurance on your business, do you feel like you wasted your money if you didn’t have a fire?  Of course not!  Contracting electricity and gas is like getting an insurance policy to protect your budget!  You have absolutely no way to accurately budget your electricity and natural gas costs without a supply contract.

If your contract does not have any cancellation fees, believe it or not, it probably doesn’t do a very good job of protecting your price exposure.  You can’t have your cake and eat it too, as they say!

Want to learn more?  Call us!

Duke Energy Files for Electricity and Gas Rate Increases in Ohio

Duke Energy Ohio filed for rate increases that would raise  electric and gas bills for customers in southwest Ohio.

On Monday, the Cincinnati-based utility filed applications with the Public Utilities Commission of Ohio, asking for approval of an $86.6 million increase in the electric rates and a $44.6 million increase in gas rates. Duke wants the rate increases to take effect in January 2013.

Under the proposals, commercial and industrial customers would see about a 4.6 percent increase in electric rates and about a 3.7 percent increase in gas rates.

The Office of the Ohio Consumers’ Counsel has filed to intervene in the case on behalf of consumers, but is still reviewing details of Duke’s applications before commenting, Consumers’ Counsel spokesman Marty Berkowitz said.

The proposed electric rate increase would affect 690,000 customers in all or parts of Brown, Butler, Clermont, Clinton, Hamilton, Highland, Preble, Montgomery and Warren counties. The proposed gas rate increase would affect 420,000 customers in all or parts of all those counties with the exception of Preble.

Duke Energy spokesman Jason Walls said the increases would allow the utility “to begin collecting from customers the investment it has already made to improve the electric and gas systems.”

Duke has invested $310 million in projects to improve electric service reliability, according to the utility. The electric rate increase also is needed because of increases in general operation and maintenance costs for the distribution system and because of a decline in sales volumes since 2009.

The natural gas rate increase is needed to help reimburse the utility for the more than $500 million it invested in upgrading pipes and other parts of the gas distribution system at a time when the volume of natural gas sales had declined and for the more than $65 million needed to clean up two former manufactured gas plants.

Duke Energy will have 60 days to provide supporting testimony before the Public Utilities Commission staff makes its recommendation. Time also will be allowed for any objections to be filed and for public hearings before the commission makes its decision. The commission has 275 days from the time of the application to make its decision.

Green Energy Prices Fall – More Affordable Than Ever

Prices for Green Energy have come down slightly. You can purchase Green Energy with two “flavors”:

  • 100% Green-e Certified Clean Source, or
  • 100% Green-e American Wind

The 100% American Wind has a slightly higher price of $0.00007 per kWH.  So for 1,000,000 annual kWH, the incremental cost is only $70.

You can offset any percentage of your electricity with Green Energy, allowing your company to enhance brand image with the fact that you use Green Power.  There are no switching costs.

At today’s market, the price per kWH ranges from $.0025 to $0.00109, so it is affordable for almost any company to use Green Energy, thanks to easily available Renewable Energy Credits (RECs).  Final prices subject to market conditions when contracted.

Call 617-332-7767 for more details.

Why You Should Contract Energy for 2013 & 2014 Now

Some electricity and natural gas customers are hesitant to contract their utilities for more than a year, because the price is higher than shorter term contracts.  There are some compelling reasons to contract for a longer term that demonstrate the value of paying the “risk premium” for an extended contract.

First, let’s look at why prices are so low today

  • Collapse of commodity bubble and the global recession led to a dramatic decline in energy prices from 2008 to 2009.
  • 12-month strip declined from $13 to $6 per MMBtu in just 6-months
  • Prolific shale gas production – as the economy rebounded and oil and other commodity prices rose, shale gas dramatically grew in the US natural gas supply. So natural gas prices detached from crude oil in 2009 and remained low due to new supplies. Essentially, natural gas is primarily in the US market while many other commodities trade globally. This has insulated natural gas and electricity prices from significant volatility.
  • 12-month strip prices ranged  from $4 to $6 per MMBtu from 2009 through October 2011
  • Record breaking warm winter– last winter was the warmest winter on record for the United States. The weather resulted in dramatically reduced natural gas demand for heating.
  • The result was a record natural gas storage surplus that required lower prices to re-balance the market.
  •  As of March 30th, storage inventories were 887 Bcf (or 55%) above the previous year and 934 (60%) above the 5-year average.
  • This surplus would be unsustainable because it would result in storage inventories above 4,600 Bcf. Domestic storage capacity is approximately 4,100 Bcf.
  • Therefore, there were 2 possible outcomes.

a. A combination of supply reductions and/or demand increases to rebalance the market by reducing storage injections to avoid a fall storage glut;
OR
b. Inventories reach capacity prior to winter demand commencing. The resulting storage glut would require precipitous price declines to shut-in supplies for immediate balance of the market.

  •  The potential for either outcome pushed down near-term natural gas prices.
  • Prompt month natural gas fell to $1.90 per MMBtu and the 12-month strip prices fell to a 10-year low of $2.61 per MMBtu on April 18, 2012.
  • Long-term prices fell to new lows, but maintained a significant premium over the prompt month because current year storage has limited impact on long-term prices.
Why don’t we think this will continue? Why do we expect prices to rise?

Compared to 2011, the natural gas storage surplus has fallen from 55% to 27% over 12-weeks.
And injections have average 27 Bcf/week below injections from last year. This pace is more than
needed to avoid a storage glut.

The smaller injections were primarily caused by (1) coal-to-gas switching in the
generation stack and (2) reduced natural gas production, both of which have been
driven by lower prices.

  • The result is that prompt natural gas prices have raised from $1.90 to recent highs over $2.80 per MMBtu.
  • The reaction by generators and producers has illustrated that market participants will react strongly to low prices, thereby reducing the chance for a repeat of sub-$2.00 prices.

Storage surplus will be smaller in 2013

  •  The current surplus of 653 Bcf must fall to approximately 248 Bcf (capacity of 4,100 Bcf minus November 2011 inventory of 3,852 Bcf) by the end of the injection season.
  • Less supply cushion = higher prices as the cushion acts like insurance for an extremely cold winter.
  • Smaller surplus = reduced need for lower prices to re-balance the market via producer cuts or for coal-to-gas switching.

Impact of producer reactions

  • Current natural gas rig counts are down by 38% versus a year ago, which is a strong indication that producers are reacting to low prices.
  • Gas-directed rigs are dropping rapidly, suggesting a meaningful gas response going into 2013 with higher prices.

Conclusions

  • Natural gas prices below $3.00 have significantly impacted drilling economics.
  • Expect reduced natural gas production in 2013, which support higher prices compared to 2012.
  • Price upside is limited as there are tremendous shale reserves available at modestly higher price levels.
  • There is one final but very important reason that makes ourrepeat of 2012 unlikely – the chance of reaching a consecutive record warm winter again is mininscule.  Therefore, we can predict an increased demand for gas and higher prices.

So, customers should consider buying now at historically low prices as opposed to waiting and recieving the likely higher rates in 2013 and 2014.

This next chart displays the Current Percentile, which represents the percentage of days during the stated period in which the market price has been below the current price.

Why buy 2014 as well as 2013 now?

  • Evidence is stacking in favor of higher prices in 2013 that include normalized weather, reduced coal-to-gas switching and producer reactions to low prices which are expected to impact 2014 as well.
  • In addition, growing gas demand due to potential for a strengthening US economy and expected closure of significant coal generation in anticipation of EPA regulations.
  • Upcoming EPA Mercury and Cross State Air Rule are anticipated to motivate between 50 to 80 GW of retirements of active coal plants. The pace of retirements will be dramatically faster beginning in 2014. Note that retirements of over 30 GW of capacity have already been formally announced.

What if you wait until September?

  • Your decision to wait might be correct if we do not have a hot summer and the weather is mild.
  • Hurricane impact on gas prices has been reduced with the growth of shale extraction inland which does mitigate some risk
  • BUT, the market is so low right now, that if you guess wrong on the weather, you will be paying higher prices
Understand that electricity and gas contracts are intended to protect you from price risk.  Timing the market is impossible. Lock in your price and eliminate your risk of rising prices.

Better Cost Control makes no representation or warranty regarding the accuracy, reliability, comprehensiveness, or currency of the aforementioned data.
This information is being provided as a courtesy and should not be construed as an offer to sell, a solicitation of an offer any energy commodity.
Past performance is not necessarily indicative of future results. Reliance upon this information is at the sole risk of the reader.

First Time since 1973- Natural Gas and Coal Each 32% of Electricity Generation in the US for April.

This is a market update for June 29, 2012.

The Aug12 natural gas contract is up $.03 to $2.75. The Aug12 crude contract is up $2.64 at $80.34.

The Aug12 contract finished down 7 cents yesterday to $2.722.  The market was down as much as 15 cents at one point following the natural gas storage report which yielded an injection of 57 Bcf which was slightly above market consensus of 53.

As we have continued to talk about coal to gas switching a lot more in recent months, as natural gas prices have dropped to a level where it is competitive with coal.  The EIA reported this week that Natural gas and coal accounted for 32% each of net electricity generation in the US for April.  This is the first time gas has matched coal since the EIA began collecting data in 1973.  In 1973 coal accounted for 45.5% of generation while gas accounted for 18.3%.  Heat will continue to grip the majority of the country pushing up short term gas and electricity prices.

United Illuminating in Connecticut Posts Competitive Supplier Numbers

United Illuminating has posted electric migration statistics as of May 31, 2012.

The growth in the number of customers on competitive supply from the end of April to the end of May was 900 accounts, down from the growth of 1,100 accounts from the end of March to the end of April.

As of the report date, 22,458 business standard service customers, or 58% of customers served, were supplied by a competitive electricity supplier.  The remaining 16,055 customers, or 42% of the customer class count, were still on the UI supply, paying the higher electricity supply rate.  On an annual kWH basis, 79.5% of the business load is with a competitive supplier.

 

 

 

Maryland – Delmarva Files New SOS Rates

Electric Meter

Delmarva has filed with the Maryland PSC new Type II SOS rates for the three-month period beginning September 1, 2012.

Customers who do not shop for supply from an alternate electric provider in Maryland receive Standard Offer Service, or SOS, from their utility. How SOS is priced depends on a customer’s class and size.

Large business and industrial customers (those above 600 kW) receive hourly prices from the PJM wholesale market. These prices vary with the spot wholesale market price of electricity, which is extremely volatile. Thus, most large customers have contracted with a competitive energy provider to avoid these hourly prices, and receive rate stability.

Medium-sized business customers (25 kW to 600 kW) receive an SOS price that changes quarterly, and are known as Type II customers. All the electricity supply to serve these utility SOS customers is bought every three months, meaning prices often vary widely during the year. Customers can avoid these price fluctuations by contracting with a alternative electric provider.

SOS prices for residential and small commercial customers (under 25 kW) change every six months. Supply for this class, known as Type I, has been “laddered” to shield customers from exposure to the wholesale market at any one time. The supply needs for these customers are split into quarters, and 25% of supply is procured every six months for a period of two years — meaning the SOS price is a revolving mix of old and current supply contracts. While intended to shield small customers from the price volatility witnessed by larger customers, this “laddering” can also raise prices through risk premiums. The SOS price also does not fall as quickly when the wholesale market price falls, because only a small part of SOS supply is being bought in the current market. Customers can take advantage of falling prices faster by choosing a competitive energy provider that offers lower rates when market prices fall.

Delmarva-MD SOS Energy Rate 9/1/12 – 11/30/12 (¢/kWh)

Small General Service- Secondary Service “SGS-S”:
6.4940

Large General Service – Secondary “LGS-S”
On Peak: 6.4940
Off Peak: 6.4940

General Service- Primary “GS-P”
On Peak: 6.4940
Off Peak: 6.4940

Since these SOS rates are only for three months, all market indicators tell us that on December 1, 2012, customers on the SOS rate will find their prices rising. Contracting for a longer term will protect customers from price volatility.

Pepco files Maryland new Type II Standard Offer Service Rate

Electric MeterPepco has filed with the Maryland PSC new Type II SOS rates for the three-month period beginning September 1, 2012.

Customers who do not shop for supply from an alternate electric provider in Maryland receive Standard Offer Service, or SOS, from their utility. How SOS is priced depends on a customer’s class and size.

Large business and industrial customers (those above 600 kW) receive hourly prices from the PJM wholesale market. These prices vary with the spot wholesale market price of electricity, which is extremely volatile. Thus, most large customers have contracted with a competitive energy provider to avoid these hourly prices, and receive rate stability.

Medium-sized business customers (25 kW to 600 kW) receive an SOS price that changes quarterly, and are known as Type II customers. All the electricity supply to serve these utility SOS customers is bought every three months, meaning prices often vary widely during the year. Customers can avoid these price fluctuations by contracting with a alternative electric provider.

SOS prices for residential and small commercial customers (under 25 kW) change every six months. Supply for this class, known as Type I, has been “laddered” to shield customers from exposure to the wholesale market at any one time. The supply needs for these customers are split into quarters, and 25% of supply is procured every six months for a period of two years — meaning the SOS price is a revolving mix of old and current supply contracts. While intended to shield small customers from the price volatility witnessed by larger customers, this “laddering” can also raise prices through risk premiums. The SOS price also does not fall as quickly when the wholesale market price falls, because only a small part of SOS supply is being bought in the current market. Customers can take advantage of falling prices faster by choosing a competitive energy provider that offers lower rates when market prices fall.

Pepco-MD Generation Service Charge 9/1/12 – 11/30/12 (¢/kWh)

Schedule MGT LV II
On Peak: 6.143
Intermediate: 6.143
Off Peak: 6.143

Schedule MGT 3A II
On Peak: 6.059
Intermediate: 6.059
Off Peak: 6.059

As of this writing, the above prices are lower than alternative fixed price contracts that begin in September.  Since these SOS rates are only for three months, all market indicators tell us that on December 1, 2012, customers on the SOS rate will find their prices rising. Contracting for a longer term will protect customers from price volatility.

MedEd Announces New Electricity Cost To Compare

Met-Ed, a First Energy Company, has posted the new electricity Prices to Compare for the three-month period beginning June 1, 2012.  You should look at your utility bill to determine your rate class.  Use the figures below to compare prices offered by different competitive electricity generation suppliers.  You will save money if the price quoted is lower than the price below.  As of this writing, prices from a variety of Better Cost Control competitive suppliers in Pennsylvania are lower than the prices below.  We recommend using an electricity broker to obtain the best prices and contract terms.

The figures below reflect a State Tax Adjustment Surcharge (STAS) of -0.12%.

Met-Ed Prices to Compare effective June 1, 2012 are as follows:

Residential (RS): 6.961 cents per kWh

Residential Time-of-Day (RT): 6.961 cents per kWh

General Secondary – Non Demand Metered (GS-Small): 6.605 cents per kWh

General Secondary – Volunteer Fire Company: 6.961 cents per kWh

General Secondary – Volunteer Fire Company Time of Day: 6.961 cents per kWh

General Secondary – Demand Metered (GS-Medium): 6.605 cents per kWh

Municipal Service (MS): 6.605 cents per kWh

To learn more about a fixed price electricity contract to protect your company from price fluctuations,  contact us via email or call 800-454-0027 x150

 

How does the electricity grid work?

This video does an excellent job of explaining how the electricity grid actually works. While most people looking to contract electricity through an energy broker just care about the price, I think that it’s worth understanding how the electricity is delivered.  You can’t control the delivery cost, just the supply cost.

A picture says a thousand words, so need I say more?

PJM Electricity Interconnection Organization’s capacity locked in at price of $136 per MW

PJM’s capacity auction secured a record amount of new generation, demand response and energy efficiency resources for the 2015/2016 delivery year to keep the grid reliable as dozens of coal plants retire and are converted to natural gas.

The auction, known as the Reliability Pricing Model (RPM) auction, procured 164,561 megawatts (MW) of capacity resources at a base price of $136 per MW, compared to the price last year of $125.00 per MW.

Capacity prices were higher than last year’s because of the retirement of existing coal-fired generation, due to environmental regulations, which go into effect in 2015.

PJM serves 60 million people in 13 states in the Mid-Atlantic and Midwest and the District of Columbia. Capacity prices were higher in northern Ohio and the Mid-Atlantic region.

For the Mid-Atlantic, PJM said capacity will cost $167 per megawatt.

The Mid-Atlantic region includes utilities served by Pepco Holdings Inc’s Atlantic City Electric, Delmarva Power and Pepco; Exelon Corp’s Baltimore Gas and Electric and PECO; FirstEnergy’s Jersey Central Power and Light, Metropolitan Edison and Pennsylvania Electric; PPL Corp’s PPL Electric Utilities, Public Service Enterprise Group Inc’s Public Service Electric and Gas; and Consolidated Edison Inc’s Rockland Electric.

In FirstEnergy Corp’s northern Ohio territory, PJM said the capacity price will be $357 per megawatt due to the high number of power plant outages in that area.   With the exception of the AEP territory, Capacity is a fairly small component of the retail price of electricity, and the cost of capacity at the retail level tends to be averaged out over several years.

 

What is Load Factor?

Load factor is an expression of how much energy was used in a time period, versus how much energy would have been used, if the power had been left on during a period of peak demand. It is a useful indicator for describing the consumption characteristics of electricity over a period of time. Customers whose facilities are metered for demand can readily determine the load factor for any given month. Facilities billed at highest peak demand during the billing period should avoid periods of increased demand whenever possible.

How to Calculate Load Factor

The load factor percentage is derived by dividing the total kilowatt-hours (kWh) consumed in a designated period by the product of the maximum demand in kilowatts (kW) and the number of hours in the period. In the example below, the monthly kWh consumption is 65,000 and the peak demand is 125 kW. There were 30 days in the billing period.

Load Factor = 65,000 kWh/(125kW x 30 days x 24 hours/day) = 65,000kWh/90,000 kWh = 72.2% load factor

This load factor indicates the monthly energy consumption of 65,000 kWh used by the customer was 72.2% of the total energy available (90,000 kWh) for use at the 125 kW level.

Why is Load Factor Important?

The demand rate structure automatically rewards customers for improving their load factor. Since load factor is an expression of how much energy was actually used compared to the peak demand, customers can use the same amount of electricity from one month to the next and still cause their average cost per kilowatt-hour to drop as much as 40% simply by reducing the peak demand. For instance, a 25% load factor in the summer would yield an average cost per kWh of 13.2 cents, while an 80% load factor would yield an average cost per kWh of 7.9 cents. Remember, this is comparing two months in which the customer used the same amount of electricity (kWh) with different peak demands.

How to Improve Load Factor

Lowering the facility’s peak demand is the primary step to improving load factor and will reduce the amount paid monthly for electricity. To determine the potential for improving load factor, analyze billing records to identify the seasons during which the peak demand is the greatest. In general, the greatest demand for electricity occurs on hot days in the summer. While this implies that a large electric load is dedicated to space cooling, it is not necessarily true for every facility. It is always best to observe operations at the facility to determine what equipment may be causing the peak demand. Once the contributing equipment loads have been identified, determine what can be done to sequence or schedule events or processes in order to minimize the simultaneous operation of high wattage equipment.  Demand controllers can help prevent high demand equipment from cycling on at the same time, which will reduce your demand charges.

To learn about energy terminology, click here.

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