Sagging Energy Rates Creates An Opportunity for Power Purchasers
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You are probably acutely aware of the following: Stock markets are down. Employment is down. The dollar is down. And wholesale power prices are down.
Maybe that last one isn’t as apparent as the others. But, yes, as the economy took a nosedive in late 2008 and into this year, wholesale natural gas and power markets have dropped as well. Even as oil has had occasional price blips, natural gas pricing (which drives the wholesale price of power in much of the U.S.) continues to fall. NYMEX daily and forward gas pricing is now (mid-July 2009) about half of where it was in mid-2008.
In some areas, forward power prices have fallen almost as far. Some believe such prices are at or near their bottom, creating a buyer’s market. In a mid-February research note, Barclays Capital Bank declared that “there is little reason to wait for a more opportune time” to lock in forward pricing, where that option exists.
Where retail electricity has been deregulated (New England, the mid-Atlantic states, and Texas), facility executives have the option to buy power from either their utility or third-party power suppliers. Delivery of power continues through local utilities. In those areas, many non-residential customers have been buying power from such suppliers for years, through power contracts that fix a price, and others offering a variety of pricing plans.
Both power suppliers and utilities buy from wholesale markets. Where fuel adjustment charges allow a pass-through of wholesale market pricing, even utility pricing has dropped. This has happened in about half the states. In other cases, utility pricing hasn’t dropped nearly as far as competitive retail power prices.
Real Time Pricing: More Risk, More Reward
For those with a greater tolerance for price risk, now may also be a good time to try real-time pricing (RTP). Also called index pricing (when the underlying price is that of the hourly wholesale market), this process requires buyers to pay for electricity based on hourly usage at the prevailing hourly market price. At most times, hourly price is significantly lower than tariff-based pricing, but it may occasionally be ten (or more) times higher on very hot days, or when a power plant or transmission line fails. Many shy away from a price regime wherein the sky is the potential price limit, but the drop in demand for power due to the weak economy has put a temporary damper on such price spikes.
In states where utilities offer RTP, a deregulated retail power market is not necessary: The RTP rate accesses the local wholesale market for all customers. Your utility account rep can fill you in if this option is available in your area, and how it works.
In all cases, however, accessing hourly pricing requires a “smart” (interval) electric meter. Without one, there’s no way to bill by the hour. You can still get a monthly bill, though it may look more like a cell phone bill than an electric bill. Many customers with peak loads over 1 MW already have such meters. Smart meters are also being installed en masse in some areas as part of federal and state efforts to enhance the grid and enable more time-based pricing for all customers.
For those who control their peak demands through demand response programs, even the risk of temporarily high hourly pricing could be managed to a degree by cutting back on load until prices drop back to normal. Doing so, however, requires access to hourly market pricing and a means to deal with it in real time. Some controls firms and others offering demand response services now offer systems that link with such pricing through the Internet. They may be set to automatically initiate load reduction sequences when hourly pricing exceeds a preset level.
As with any new opportunity, facility executives should read all the fine print, whether in a utility tariff or a private power contract. To be safe, have an experienced power procurement consultant tag along on your first “date” with the wholesale marketplace. Doing so is the best way to secure the greatest value with the least risk.
Lindsay Audin is president of EnergyWiz, an energy consulting firm based in Croton, N.Y.