When the electricity markets were deregulated in Massachusetts, two basic objectives were accomplished.
The First Objective – That all regulated utilities, such as National Grid, NStar and Western MA Electric and their affiliates, were required to get out of the business of generating electricity and make one hundred percent of their profits from the physical distribution of electricity to customers. This means they are responsible for the ownership, maintenance and improvements to the infrastructure from the interstate transmission service point to your home or business.
Today, a utility company that provides Basic electric service has purchased that electricity from deregulated generators or retail marketers/ Suppliers in a lowest-price, request for proposal process monitored by the Department of Public Utilities.
The Second Objective – That generation and the marketing of electricity became unregulated and subject to competitive market forces. Sophisticated financial and commodity markets surround the deregulated electricity market with the goal of delivering dependable to supply to consumers in conjunction with ISO-NE requirements. ISO-New England is a non-profit organization that manages the grid minute to minute, manages and oversees the bulk electricity and wholesale market of which the Forward Capacity Market is apart.
Capacity for electric generation is procured by ISO-NE three years in advance based on a descending clock auction and a given cost of fuel. If the cost of fuel rises when the power is due to be delivered, the capacity obligation to generate electricity remains but the cost of electricity is allowed to rise.
Market response to world events, competitive bullish and bearish commodity forces and the capability of infrastructure to either generate power or deliver fuel for the generation of electricity, all affect the price of electricity at a given time. The affect of consumer demand for electricity also affects the cost of energy based upon the time of day when electricity is required and how many people want electricity at the same time.
In response to market forces, competitive electricity suppliers offer a full spectrum of electricity procurement products to match the budget objectives, risk and energy profile of each customer. While each company will have competitive reiterations of the same product, below are listed five electricity products that will meet a majority of your electricity purchasing needs.
How To Purchase Electricity Today
Fixed Price – A fixed price product guarantees a customer a single price per kilowatt for a contracted volume of electricity over a contracted period of time that is able to run from 1-5 years.
Fixed price purchasers are looking for budget certainty and budget management. They know their approximate annual consumption of electricity and they want a fixed price for their annual load. The customer can make one decision and receive a bill for typically a historic load that is known for a fixed price.
Indexed Pricing
Purchasing electricity using Indexed pricing can be accomplished using third party indices’ or the index issued by the providing supplier. Many companies use index pricing as a bridge product waiting for the market to decline. The customer will have the flexibility of riding the wholesale market in anticipation of potentially locking in at more competitive rate or controlling consumption of electricity usage when prices peak.
In addition, the customer may also fix the price for a percentage of usage (up to 100%) of the load for any number of calendar months that the customer selects during the contract term.
Real Time
While purchasing electricity on a Real Time basis resembles Index pricing in some aspects, for customers that consume electricity on a round-the-clock basis or with significant load during Off-Peak hours, Real Time purchasing can be used as a lowest cost purchasing strategy.
Out of 168 hours in the week, 88 of those are typically Off-Peak. Peak rates are from 7:00 AM to 11:00 PM while Off-Peak rates are from 11:00 PM to 7:00 AM, Monday through Friday and all weekend long.
How It Works – The customer signs a month-to-month renewable, flexible 30-day notice contract that is tied off of the ISO-NE wholesale rate plus a transparent adder. This product is sold with an easily understandable hedge product to limit upside pricing exposure.
Time of Use
Time-of-Use products are designed for customers who use more electricity during Off-Peak periods or can shift their load to weekends or less expensive energy periods. Depending upon the program, prices can be fixed for peak and off-peak usage and seasonal peak and off-peak adjustments as well.
Fixed and Index Combination
Fixed and Index products allow customers to hedge using the benefits of both fixed and index market prices. The fixed price applies to a contracted block volume of electricity. Hourly usage over and under the specified quantity will be priced based upon the index chosen by the customer. A number of variations on this concept exist and vary from competitive supplier to supplier.
Doug Pope is President of Pope Energy, a broker of electricity and natural gas representing the interest of the buyer.