Molly Ayala
Understanding how companies pay for electricity is crucial for optimizing energy costs. Commercial electricity bills consist of fixed and variable charges, with supply charges being the most significant component. These charges depend on the type of power plants and fuel costs, such as natural gas or coal. The price of electricity also varies based on demand, with higher prices during peak periods. Companies can reduce costs by shifting usage to lower-priced periods, conserving energy, and adopting solar alternatives. Additionally, electricity companies themselves purchase electricity or produce it by buying fuel inputs, passing on the costs to customers. Understanding these dynamics empowers businesses to make informed decisions and reduce their energy expenses.
| Characteristics | Values |
|---|---|
| Fixed charges | Utility delivery charges |
| Variable charges | Supply charges, transmission and distribution charges, non-bypassable charges, local sales tax |
| Supply charges | Dependent on the type of power plant and the cost of fuel |
| Transmission and distribution charges | Based on the total number of kWh used per month |
| Non-bypassable charges | Public benefit charges, variable charges ($/kWh) |
| Local sales tax | Varies based on location |
| Time of use | Shifting usage from high-priced to low-priced periods can reduce costs |
| Demand | Using less electricity overall reduces costs |
| Solar power | Using solar panels can reduce costs |
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What You'll Learn
Fixed and variable charges
Company electricity bills consist of two main components: fixed charges and variable charges. Fixed charges are electricity costs that remain constant regardless of electricity usage. These charges are intended to cover a utility's fixed costs, such as infrastructure maintenance and administration. On the other hand, variable charges, also known as volumetric charges, fluctuate based on electricity consumption. The more electricity used, the higher the variable portion of the bill. Variable charges can include a range of elements, such as fuel costs, energy efficiency measures, and short-term variable costs incurred by the utility company.
Fixed-rate plans offer predictability and stability, making budgeting easier for businesses. With a fixed rate, the electricity rate per kilowatt-hour (kWh) remains consistent for a specified period, usually at least three billing cycles or the term of the contract. This protects businesses from sudden changes in market prices and provides certainty during the agreement. However, if market prices drop, businesses on a fixed-rate plan will not benefit from the lower rates until their contract ends. Additionally, switching plans may incur early termination fees.
Variable-rate plans offer flexibility and the potential for cost savings. With a variable-rate plan, the electricity rate per kWh can change due to various factors, including market conditions, weather, demand, and energy provider costs. For example, during periods of extreme weather, wholesale electric prices may surge, leading to higher rates. Variable contracts often do not have early cancellation fees, providing businesses with more flexibility to switch plans. However, it's important to consider that variable rates can result in higher bills during periods of high electricity demand.
The choice between fixed and variable rate plans depends on a company's risk tolerance, budget, and energy usage patterns. Fixed-rate plans may be preferable for businesses seeking predictable bills and protection from market volatility. On the other hand, variable-rate plans can be advantageous for companies willing to take on some risk in exchange for the potential of lower rates during certain times of the year. Additionally, businesses with lower electricity usage may find variable-rate plans more cost-effective, as they can handle fluctuations in their bills.
It's worth noting that electricity bills may also include non-bypassable charges (NBCs), which are typically variable charges per kWh. These charges are usually related to public benefits and are unavoidable, even with the use of solar energy. Local sales tax may also be included in electricity bills, impacting the overall cost.
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Cost of electricity production
The cost of electricity production is a complex topic, with many factors influencing the final price. Electricity production costs can be broadly categorized into wholesale costs, retail costs, and external costs.
Wholesale costs refer to all expenses incurred by utilities in acquiring and distributing electricity to consumers. This includes initial capital investments, operations and maintenance (O&M), transmission infrastructure, and decommissioning. These costs are typically passed on to consumers and represented as dollars per megawatt-hour (MWh) or dollars per kilowatt-hour (kWh).
Retail costs are those paid directly by consumers and are influenced by the type of power plants and the cost of fuels used. For example, natural gas power plants may charge higher rates during peak demand periods in the winter. The price of electricity can also vary based on the region and the utility provider.
External costs, also known as externalities, are imposed on society and the environment. These include the negative impacts of fossil fuels, such as damage to the environment and human health, as well as contributing to global warming. According to the ExternE research study, these external costs can significantly increase the overall cost of electricity production, especially for coal and gas.
To promote cleaner energy sources, governments offer tax subsidies and incentives for renewable energy generation, such as the clean electricity tax credits in the Inflation Reduction Act (IRA). This has made renewable sources like onshore wind and utility-scale solar photovoltaic (PV) technologies more cost-effective than traditional fossil fuel power plants.
Additionally, companies can reduce their electricity costs by shifting usage to lower-priced periods, reducing overall consumption, and adopting solar energy to lower their reliance on the grid.
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Transmission and distribution charges
The transmission charge on a company's electricity bill is influenced by how much electricity the company has used. This charge can vary depending on the region and the infrastructure expansion projects undertaken by the transmission providers. For instance, in Alberta, Canada, the average residential customer with 600 kWh of consumption paid monthly transmission charges ranging from $26.18 to $33.01 in 2023. Transmission charges typically account for a significant portion of a company's total electricity bill, such as the 15% average in Alberta.
Distribution charges, on the other hand, tend to vary based on location and consumption levels. Customers in rural areas often face higher distribution charges compared to those in urban areas due to lower population density and longer distances between sites. For instance, in Alberta, the average residential customer with 600 kWh of consumption paid monthly distribution charges ranging from $27.47 to $91.70 in 2023.
Additionally, companies may encounter rate riders attached to their transmission and distribution charges, leading to fluctuations in their average monthly expenses over time. Rate riders serve to reconcile the expected costs with the actual costs of operating the transmission and distribution infrastructure.
It is worth noting that companies can influence their overall electricity spending by strategically shifting their usage patterns. If a company is on a time-varying rate structure, such as a Time-of-Use (TOU) rate, they can reduce costs by using electricity during lower-priced periods of the day. This strategy can significantly impact their electricity bills, as both the supply charge and the transmission and distribution charges are volumetric, depending on the total kWh consumed per month.
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Non-bypassable charges
NBCs are usually public benefit charges, and they are an important component of company electricity bills, which also consist of fixed and variable charges. These charges are typically highlighted on monthly billing statements and can include fees such as the customer service charge, energy efficiency charge, electric assistance program fee, and any rental or financing charges.
The price of electricity is influenced by various factors, including the type of power plants that produce the electricity and the cost of the fuels that power them. For example, if electricity is primarily generated by natural gas power plants in a particular region, then the cost of natural gas will be a significant factor in determining the electricity supply charge.
It's important to note that non-bypassable charges are not limited to companies and are applicable to all energy consumers. These charges are separate from the cost of electricity production and transmission, which is priced on a per-kWh basis and varies with demand. When there is lower demand, the price of electricity is lower, and vice versa.
While most non-bypassable charges are ongoing, some may have an end date. For example, the nuclear decommissioning charge should end once the nuclear power plants have been cleaned up and their spent fuel safely stored. Similarly, the DWR charge should conclude once the Department of Water Resources has recouped the cost of the bonds it sold to pay for electricity following deregulation in California in the 1990s.
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Time-varying rates
TVRs come in four general categories: Time-of-Use (TOU), Critical Peak Pricing (CPP), Peak Time Rebate (PTR) and Real Time Pricing (RTP). TOU rates adjust the price of electricity throughout the day, with higher prices during peak demand times and lower prices during the rest of the day. CPP is a pricing structure where customers are charged a higher rate for electricity used during designated peak demand periods. PTR is a plan where customers receive a rebate for reducing their electricity usage during peak demand times. RTP is a dynamic pricing structure where the price of electricity fluctuates in real-time based on supply and demand.
In 2015, the Massachusetts Department of Public Utilities adopted a new default time-varying rate structure, with all residential customers on basic service placed on TOU pricing as the default. Customers have the option to opt out and choose a flat rate instead, though with a PTR, even flat-rate customers are incentivised to curb peak-time use. Other utility companies, such as Pacific Gas & Electric (PG&E) and FirstEnergy's Ohio electric companies, have also introduced time-varying rates for their customers.
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Frequently asked questions
Company electricity bills consist of two main components: fixed and variable charges. The price of electricity depends on the type of power plants that provide power and the cost of the fuels that power them. Companies are usually billed per kilowatt-hour (kWh) and are required by law to revise their rates every six months to a year.
Understanding the billing components of a commercial energy bill is the first step in reducing electricity costs. Companies can also shift their electricity usage from high-priced periods to lower-priced periods of the day, use less electricity overall, and install solar panels to reduce their reliance on the grid.
Billing components include supply charges, transmission and distribution charges, non-bypassable charges (NBCs), local sales tax, and utility delivery charges.
