New Jersey Electric Rates to Change

The NJ State Board of Public Utilities on Thursday approved the results of state’s annual electricity auction. It sets the wholesale electricity prices that the state’s electric utilities will pay and pass through to all New Jersey customers.

For three of the state’s four utilities, including Jersey Central Power & Light and Atlantic City Electric, there will be a  decrease in supply rates on June 1.  Rates for for PSE&G will be essentially the same.

Average JCP&L ratepayers will see a decrease of 3 percent; Atlantic City Electric customers will see a decrease of 5.35 percent and PSE&G customers will see their average rates increase by .05 percent.

The price of wholesale natural gas, which powers electric plants, is lower than in 2010. Since 2009, average energy costs for  small and medium-sized businesses have fallen about 30 percent, the BPU said.

But whether prices continue to fall in future years is unknown. “We have seen relative price stability in the last couple of years,” Hanna said. “What is going to happen in the future with natural gas prices is very difficult to predict.”  This is why fixed price contracts provide the opportunity to lock in long term fixed prices to protect from increases.

The value of both electricity auctions was about $7 billion, which represents approximately 8,700 megawatts of electric generating capacity.

Why long term electricity contracts in PJM service area make sense

The inexperienced electricity buyer looks just at the price and goes with the lowest price. In today’s market (April 2012), shorter term contracts have the lowest price. But taking this approach can be short sighted. Why is that the case? First off, when you want to get a new contract in a year, your price will likely be a lot higher. As long as you know that, fine.  But there is more to understand.

In the PJM service area, one component of your fixed price are future capacity rates and trends. We are encouraging our customers to consider the longest term possible, up to a 24 month term, up to the period ending May 2015, to blend low energy prices against higher capacity rates. Locking in a longer term will protect you from the capacity price increases, which are a known number. So even if the energy cost is the same, the electricity prices will rise because of the rising capacity charges.  The higher capacity charge from next year is averaged into the present cost, which is one reason a longer term contract costs a bit more.  But when you look at your total cost over the 24-month period versus what they would be otherwise, based on the direction of the economy, you will win big overall and protect your budget.

PJM Capacity Cost Component

· June 2012/May 2013 $131.48 Per MWH
· June 2013/May 2014 $227.11 Per MWH
· June 2014/May 2015 $136.50 Per MWH
· June 2015/May 2016 Unknown at this time

· Capacity rates (set three years in advance by PJM) have increased to over $227 level for your next capacity rate contract term

· Recovering economy should keep capacity rates at least to the 2014/2015 level when PJM conducts next auction in May ‘12

· EPA’s plan for MAT (Mercury Air Toxin) rules have driven several generators to close 50’s vintage power plants due to high compliance cost coal plants exerting upward pressure on next auction. Less coal generation means higher prices, but cleaner air. Another reason to lock in a longer term contract.

Capacity charges are typically calculated based on the difference between a customer’s peak energy use during a billing period and their nominal use (normal or hour-to-hour use) during the same period. If the customer expects to have substantially more power available to them than they actually use, then a demand charge is applied to cover this difference.

Demand charges are not a means of gouging customers by charging for unused energy. Instead they are a means of insuring that customers can have larger-than-normal supplies of energy available to them at a moment’s notice.

Keep this information in mind when deciding what contract length you want. Take a long term view and next year you’ll be smiling at the decision you made. Consider the slight increase that you will pay in the short term your price for insurance against rising prices. Insurance costs money. Would you go without fire insurance because it costs money and you have never experienced a fire?