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Understanding Electricity Distribution — A US Overview
Understanding electricity distribution and how the challenges of transmission impact pricing can help a business make more informed choices. This primer on energy markets in the US outlines provider types, transmission processes and more.
A Variety of Electricity Providers
Electricity transmission and electricity distribution is handled in the United States, along with Canada, and a small part of Mexico, by several different entities. There are utilities that generate all the electricity they sell. Others power their grids with electricity purchased from power-generating utilities, power marketers and independent power producers.
While generation is deregulated in some areas of the US, electric delivery (distribution) remains regulated because of the natural monopoly controlled by the local utilities who own the distribution networks. Regulated utility rates are set via a public rate making process and are based on operating expenses, depreciation and amortization, taxes, and return on investor provided capital.
In 16 US states (+DC) and numerous countries throughout the world, former monopolies have been deregulated and generation assets have become privatized. Deregulating electricity supply is meant to create competition to lower prices, promote choice of products, encourage investment in new generation while increasing capacity and energy efficiency.
Deregulation created the need for efficient pricing markets:
- Day-ahead – price is determined by matching offers from generators to bids from consumers, usually on an hourly interval
- Real-time — balancing differences between day ahead scheduled loads/prices and real-time load/prices in a spot market.
Energy deregulation led to the creation of competitive markets:
- NYISO – New York
- PJM – Delaware, Illinois, Maryland, Michigan, New Jersey, Ohio,
- Pennsylvania, and the District of Columbia
- ERCOT – Texas
- ISO-NE – Connecticut, Rhode Island, Massachusetts, New Hampshire, Maine
- CAISO – California (partially deregulated)
Electricity Distribution Process
In the US, transmission also remains regulated, and the Federal Energy Regulatory Commission (FERC) regulates interstate wholesale trade and the associated transmission interconnections; Western Interconnection, Eastern Interconnection, and ERCOT Regional Transmission Operators (RTOs) administer the transmission grid throughout North America.
Regardless of the different brand names given by the suppliers, all supply products are variants of:
Fixed Load Following
Commodity cost is calculated on a monthly basis as total usage (kWh) times the negotiated fixed commodity price plus applicable taxes
Commodity cost is calculated by (a) multiplying the hourly day ahead or real-time electricity rates as published by the local ISO by the actual hourly usage of the property and (b) adding to that number the negotiated “adder” multiplied by the kWh
Commodity cost is calculated as a combination of a negotiated fixed price for a portion of usage (Block/Tranche) plus applicable taxes with the remaining load purchased on the Day Ahead/Real Time index. Product also includes variations such as cap and collars and price triggers.
Throughout the nation, local electricity grids are interconnected to form larger, more reliable networks. The interconnections help meet demand consistently by providing multiple routes for power to flow and by allowing generators to supply electricity to many loads. Redundancy in the system helps prevent failures that cause service interruptions.
With daily load varying by region, climate, and time (daily, monthly, seasonally), electricity supply and demand is a challenging business. Nevertheless, a deeper understanding of what’s driving costs on your accounts can inform business decisions.
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