If you’re like most people, when you get your energy bill, you look at the amount due and perhaps consider the total usage (kWh) that drove that month’s expense.
Beyond that, though, you likely haven’t given too much thought to all the different pieces that get added together to make up your bill. Understanding each component, however, can help you manage your overall energy expense.
After Generation costs, Capacity charges are often the second largest cost-per-kWh on your bill.
A Capacity charge is typically based on your “peak” energy use during a specific period. Depending on your location, the Capacity charge may be set annually or monthly.
With Capacity charges, you are paying for the availability of your peak usage regardless of when it occurs. Put another way, you are paying the grid operator to have the capacity to meet your peak demand, even if you rarely use your largest expected amount.
Similarly, power generators and transmission owners are paid for the capacity they commit to the grid, whether or not they are called upon to deliver it. Under this structure, you, as an end-user, can be paid a Capacity charge (called, in this case, a Capacity payment) for participation in demand response (DR) programs.
Generation Capacity charges are the basis for demand response payments for those customers who are able to curtail their electricity use according to the specific DR program rules in their market.
Although Capacity charges for generation and transmission are billed through the customer’s utility, these costs are established through each region’s Regional Transmission Operator (RTO). Each sets the costs for generation capacity and has its own rules as to how this capacity is priced.
Auctions are held within each RTO to determine the capacity price for a given delivery period. PJM and ISO-NE set their prices three years in advance, with incremental auctions to allow for adjustments. NYISO has an auction one month before the delivery period and monthly auctions to determine a monthly capacity price. Transmission costs, meanwhile, are set by each transmission owner and paid to the RTO, but must be approved by the Federal Energy Regulatory Commission (FERC).
In PJM, each end-user’s generation capacity charge is based on their demand during the five peak hours for the entire PJM Zone from June through September; this is called their peak load contribution (PLC). The transmission charge in PJM is set on the one coincident peak hour of demand in the end-user’s utility zone, and is adjusted and finalized by the distribution utility. NYISO and ISO-NE base their capacity charges on the single peak hour within the network. The customer’s coincident peak demand is adjusted for weather and system scaling factors, and utility specific rules.
Although complicated, the rules for setting capacity charges are relatively formalized (though complex). This means customers have very real opportunities to control supply costs by managing their peak demands.
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