What’s All This Talk about Purchasing Competitive and Clean Energy?

If you attended February’s Energy Purchasing Forum for Montgomery County Nonprofits, you might have walked away with more questions than answers! To help understand clean electricity, the Montgomery County Department of Environmental Protection has put together a helpful primer. (It’s all after the jump!)

Purchasing Competitive and Clean Electricity: A Primer for Montgomery County Nonprofits
prepared by the Montgomery County Department of Environmental Protection

What is the power grid?
There are three primary components of the electric or power grid:

  1. Generation, which provide the electricity needed to run our everyday conveniences (e.g., the photocopier),
  2. transmission which are large scale lines that move electrons hundreds of miles from their point of generation, and
  3. Distribution systems which bridge the gap between the transmission system and the lines that bring electricity to your organization and are controlled by your local utility.

For more information on the workings of the grid visit http://science.howstuffworks.com/power.htm

What is “Competitive Energy Supply” and why does it matter now?
Maryland is a deregulated state, which means you can bargain for better-priced electricity.  In Maryland, there are competitive energy suppliers, each licensed by the Maryland Public Service Commission (MD-PSC) to market electricity to customers.  Under deregulation, a utility (in Montgomery County utilities are Pepco, BG&E or Allegheny) is responsible for delivering or distributing energy supply to your organization and is your “Provider of Last Resort (POLR) or Standard Offer Service (SOS)“, if you do not select a competitive energy supplier. For years, many utility costs were capped, keeping electricity rates artificially low.  As caps have been lifted and SOS/POLR rates have caught up to the real cost of electricty, in many cases, soared past them.

In particular, SOS/POLR service rates have remained elevated as the utility auctions that establish prices are guided by MD PSC rules intended to stabilize prices and protect consumers.  This process also locked in high prices realized during the energy price spikes, right before the current economic downturn. Competitive energy suppliers can be more nimble, mixing long and short-term contracts and obligations with other innovative purchasing strategies.   They can also deliver renewable energy, in a number of blends, to balance environmental and budgetary objectives.

What is clean energy?
Clean energy is energy generated from environmentally preferable sources such as wind, solar, biomass or low-impact hydroelectric that do not contribute to climate change, greatly reduce impacts on the environment, help secure our nation’s energy independence, and create new jobs for our economy.All individuals and businesses can opt for clean energy by selecting a competitive energy supplier that offers products consistent with their organizations values and needs.[1]

Common “Energy Acronyms” and Terms kWh or kilowatt-hour: The amount of electricity used over time.  Many fees on your bill are multiplied times this value. kW or kilowatt: The intensity of electricity use or how fast you are consuming energy, known as demand.  The more demand you require, particularly during peak times such as mid-day in the summer and business hours the more you will be billed.  Choosing a competitive energy supplier will not relieve these charges, but these charges when high during certain parts of the day can impact prices suppliers may offer.Surcharges and Fees: Fees, and sometimes credits, levied for environmental remediation, taxes by local governments, public energy-efficiency programs and other uses.  Usually multiplied times kWh not a factor for competitive energy supply.

Not all clean energy is equal and clean energy from different sources or regions will command different prices and have different associated benefits.  For example, there may be a premium for clean energy derived from solar sources or from sources that help generate local jobs.  However, all suppliers should be able to provide information on the benefits of their source.

What is pooling or aggregating energy purchases?
Pooling energy purchases, also known as aggregating, either formally or informally, enables organizations to buy cheaper energy from a competitive energy supplier as a group.  Group rates are often significantly less than those paid by individual organizations. Shopping carefully and pooling purchases increases bargaining power and options.  Depending on factors such as number, types of participants and clean energy content, a savings of 10 – 20% is possible. Regardless of the pooling method, generally once prices are quoted, participants or the pool will have approximately 24 hours to opt in or out of the purchase.   Newcomers to the pool may be able to join later depending on market conditions, or may form a second “group” for a quote at any time.

How would a change show up on our bill?
Businesses purchasing energy from a competitive energy supplier will always receive a bill, either hardcopy or electronic, from their distribution utility for delivering energy, including maintaining neighborhood power lines, meters, transformers, etc. and all local taxes and fees (typically total = 25 to 30% of the bill).  The remainder of the bill labeled “electricity supply or generation” and “transmission” is the cost of the electricity and long-distance transmission from the power plant to the local distribution utility.  For customers who opt for a competitive supplier, this part of the bill takes the place of “SOS generation” or is billed separately.

Who arranges or supplies competitive clean energy?
The most common types of entities that procure competitive energy supply are:

Suppliers: Secure contracts for electricity from contracts with large-scale generators.  Suppliers then package this electricity supply for consumption by clients using a number of pricing and product structures to meet the client needs.

Brokers: Assist customers in procuring energy supply, often from the most cost-efficient sources. The broker places the account with an appropriate supplier and is paid a small fee per kWh or from the supplier. Many brokers package accounts and seek supply from multiple suppliers.

Aggregators: Are a specialized form of broker that packages client accounts together to make them more attractive to energy suppliers and, in most cases, secure better terms than participants could achieve on their own.  Aggregators will typically take into account a wide variety of factors and group organizations with complementary energy use characteristics (e.g., an organization with high summer demand with one with low summer demand).  A team or lead organization generally negotiates energy supply with a set number of participants.  Once pricing is obtained, participants have a set period in which to opt-in.  A significant loss of participants can affect pricing for the entire group.

Energy Consultants:  Seek and negotiate the most cost-efficient and competitive energy suppliers.   In this case, the client usually pays the consultant a fee and the client or group of clients finalizes the purchasing arrangement with the chosen supplier.

What are some of the different products and services that suppliers, brokers and aggregators use to set themselves apart from competitors?
Off the Shelf Product:  Standard pricing options offered to all clients.

Affinity Group: A negotiated “group price” often expressed as a flat discount over off-the -shelf prices.  For example, all members of a coalition may receive “10%” off the off-the -shelf electricity price for being part of an affinity group.  Affinity groups can be used to complement more formal aggregated efforts.  For example, a group of organizations that purchase collectively may negotiate for their employees or congregation members to receive other special offers or discounts.

Brokered Price: The price for an individual or group that reflects the best energy supply option given usage characteristics.

Clean Energy Percentage: The percentage of clean energy in an energy supply option.  Note that approximately 6% clean energy is the regulatory minimum that all energy suppliers must offer.  Typically 25% or greater is considered beneficial, and 50% to 100% is considered proactive.

Community Donation Programs: Each year suppliers are generating new perks to attract customers, such as programs where if community members or members of an affinity group select competitive energy supply, a charity or organization of their choice receives a donation.  Some also offer other services such as energy audits at reduced rates.

What factors affect pricing for a purchasing pool?
One option for a pool is an “all for one, one for all” purchase where a blended price is quoted.  Under this scenario, large organizations may pay slightly more and smaller organizations significantly less.  This is generally a more formal aggregation and requires either a more dedicated organization or a more sophisticated vendor.

Another option is for the pool to work with one supplier/broker, but receive individual pricing based on each nonprofit’s characteristics. Under this strategy most participants are likely to receive a savings.  However some may remain very close to SOS/POLR or be quoted prices slightly more and thus may opt out. This informal aggregation is the least onerous for groups of smaller organizations and allows engagement of broker and suppliers.

Pricing for the group, or the organization, under the strategies above will be affected by demand, size, credit worthiness, and length of contract. 

What are the risks associated with energy markets?
Prices will be influenced by factors that affect the wholesale price of energy including time of year, national/regional energy demand, transmission constraints, widespread storms in fuel generating areas (e.g., hurricanes) and even failures or accidents at large generating facilities.

Energy markets are always in flux and subject to rapid changes. As a SOS/POLR participant you have largely been shielded from this by the auction structure that guides the rates.  If you start pursuing competitive prices, rates may change daily until a price is locked in for a negotiated contract term.

Currently, due to the recession, energy demand decreased nationwide.  This frees up energy supply and enhancing competition in the market.  Prices are exceptionally low and it is generally considered a good time to “buy”.  But there are no guarantees that pricing will not fall further.

Selecting a contract term is a key factor of risk tolerance and depends on whether an organization values the lowest price in the short term, or price security in the long term.  Often counter intuitively, betting on future price increases, contracts have lower prices for one-year terms with slightly higher prices for two and three-year terms reflecting the vendors risk of future increases.

Generally, most small organizations opt for a one to three year purchase, depending on their risk tolerance and organizational interests.

[1] Applicants may also purchase renewable energy certificates, in lieu of a clean energy product  which I documents the environmental attributes of the clean energy product.

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Suzan Jenkins is the CEO of the Arts and Humanities Council of Montgomery County.

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