What You Need to Know About 2014 Capacity Rates in PJM

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1 What You Need to Know About 2014 Capacity Rates in PJM You may have heard about capacity rates in PJM going up next year, beginning June 1, 2014, which is the first day of PJM s capacity delivery year. We would like to provide you h some important information regarding those increases, as well as some insight into what you might be able to do to help mitigate some of the impact to your energy budget. First, we'll take a look at what capacity is, why it exists and how your capacity charges are determined each month all of which are important in determining how to control your capacity costs. What are capacity charges? In several electricity markets, independent system operators (ISOs) or regional transmission organizations (RTOs) make payments to power generators for the availability of their generation sources independent of and in addition to the cost of the energy they produce. These payments provide an incentive for generators to locate in a particular market, and they are intended to guarantee that there will be sufficient generation resources to meet the maximum energy requirements of the market at all times. To fund these capacity payments to generators, the ISOs and RTOs administer auctions to sell capacity to load serving entities (LSEs), like Direct Energy Business, to cover their total customer peak load hin a given market/zone. This approach is called Reliability Pricing Model, or RPM. The results of the capacity auctions, which are measured in dollars per megawatt day ($/MW-day), are then passed through to consumers as part of their electricity supply charges. Auctions for capacity in the PJM (Pennsylvania Jersey Maryland Interconnection) ISO are held far in advance (approximately three years) of the timeframe for which they apply and the capacity clearing prices derived through the auctions change each year on June 1. But, the price of capacity isn t the only factor impacting your capacity costs. Capacity cost determinants how are my monthly capacity charges calculated? Capacity rates alone do not determine your total monthly capacity costs. There is another important element that goes into calculating what you owe each month for capacity charges: your peak load contribution (PLC) or "capacity obligation." The PLC is, quite simply, your average peak demand, measured on the five highest-demand days of the summer (June-September) (also called coincidental peak days ). PJM will determine hout notice the five hours of the summer (typically measured on the five hottest days), when the demand hin a settlement zone is the highest (note: PJM does not disclose which days were the actual coincidental peak days until sometime after the summer). Your usage during those five coincidental peak days prior to the delivery year will be averaged and that average measured in kilowatts (kw) will be provided to us from your host utility and used to calculate your capacity costs. This number/value from the prior year represents your "capacity obligation," and can be found on your invoice (if you are billed by us), near the top of your supply charges. This capacity obligation is then used to calculate what you owe for capacity charges each month, using the following calculation: Your PLC (kw) x Capacity Rate ($/kw-month) = total monthly capacity charges Why is the PLC important? When looking at the charts on pages 4-7, which illustrate where capacity rates have been and where they are going, it's important to keep in mind that capacity rates are non-negotiable. Once the RPM auctions have taken place and prices are settled (by regional pricing zone), there is no way to lower the going-rate. However your capacity obligation IS something that you have the potential to modify, if you are cognizant of when the ISO's coincident peak days are likely to be selected. To do this, you can: Loosely estimate the hottest days of the summer and assume there's a good chance those days will be "the days" when the strain on the grid is the highest. The five peak hours typically occur on weekdays and are more extreme on each consecutive hot-streak day. Stay in close touch h your Direct Energy Business Representative to receive sound, unbiased advice from an experienced team of market intelligence professionals (over)

2 2 How can I modify my PLC? Once you have an idea of when the coincidental peak days may occur, you will want to: aim to lower your usage on those days, as much as possible especially during the on-peak hours of Monday- Friday, 7 a.m. to 11 p.m. EPT (Eastern Prevailing Time). As an example of how lowering your PLC can make a difference to your bottom line, please refer to the Customer Snapshot below, which illustrates (using real customer data) the type of savings that can be achieved by making specific percentage reductions in usage on coincidental peak days. Customer Snapshot The following data represents real customer information for a medium-sized manufacturer located in the Duquesne Zone*. The sample data shows some important numbers behind what their capacity costs will be for the June 1, 2014 to May 31, 2015 capacity delivery year assuming they remain at their current peak load contribution (PLC) after this summer s assessment as well as calculations for what their costs would be if they reduced their PLC by 5%, 10% or 20%, going into the 2014 capacity year. Assumptions for the below calculations: Annual Usage: 22,478,000 kwh Capacity Rate: $4.42/kW-month Capacity Delivery Year Data h Customer PLC at Status Quo Current Cap Tag (PLC): 2,966 kw Annual Capacity Costs: $159,266 Capacity Delivery Year Data h Customer PLC Reduced by 5% Cap Tag 5% Reduction: Annual Capacity Costs: 2,818 kw $151,302 (savings=$7,964) Capacity Delivery Year Data h Customer PLC Reduced by 10% Cap Tag 10% Reduction: Annual Capacity Costs: 2,669 kw $143,339 (savings=$15,927) Capacity Delivery Year Data h Customer PLC Reduced by 20% Cap Tag 20% Reduction: Annual Capacity Costs: 2,373 kw $127,412 (savings=$31,854) (next page) * Results such as these are not typical. Your potential savings, by lowering your peak load contribution, will depend on several factors, including your monthly usage, your final PLC (as determined by your local utility), and your pricing zone.

3 3 How Can I Obtain Help h PLC/Load Reduction Strategies? Direct Energy Business offers a full suite of energy management services that can help your business/enterprise gain control of its energy usage and identify cost-saving opportunities, including through capacity obligation reduction strategies. Please visit for more information. Taking a step back: why is there going to be an increase? If you look at the chart on the page 4, which plots capacity rates from 2010 to 2017 behind the impacted zones in PJM, you will notice that rates have been high during certain timeframes in the past and then have dropped significantly for the capacity delivery year. Some of these changes are due in part to the fact that RPM auctions for capacity prices are held three years in advance. At the time when the auctions were held for the rates that apply to the current timeframe (delivery year ): The country was in a recession and power and gas demand were down comparatively. During the same timeframe, PJM had established and grown several demand response programs to help consumers hin their jurisdiction make calculated reductions in usage during peak demand timeframes which also lowered the expected need from generators in the PJM region. In addition, h the finalization of the rules around air pollution standards by the Environmental Protection Agency (EPA), future capacity prices in PJM (as shown on the chart on page 4) from 2015 on reflect the likelihood that some coal plants in PJM will be retired. If coal plants are retired, the capacity demand on other generators in the region increases, thus causing auction prices for 2015 capacity (and beyond) to rise. When/where will we see an increase? Next year we will see an increase in rates that take us back to where rates were several years ago (prior to the recession). These rate increases are most significant in the following PJM pricing zones: AEP Allegheny Power ComEd Dayton Power & Light Duquesne Light First Energy (all utilities) Duke The first major increase will occur on June 1, 2014, which is the date (June 1) each year when PJM's new capacity rates/delivery year go into effect. (Please refer to the charts on pages 4-7 for more information on historical and future capacity rates in these pricing zones). Who is impacted by the increase? All customers behind the aforementioned pricing zones will be impacted. However, customers who have a product configuration where capacity costs are passed through each month will have the most visibility, since the increase will be shown as a line item on your invoice. If you have a fixed all-in or fixed/index h fixed adder contract that runs through the capacity delivery year, the capacity price including the increase is built into your energy price/fixed adder already. If you have a fixed all-in or fixed adder contract that expires in April/May 2014, the higher rates will likely have an impact on the overall $/kwh fixed rate or fixed adder on your next agreement. * Results such as these are not typical. Your potential savings, by lowering your peak load contribution, will depend on several factors, including your monthly usage, your final PLC (as determined by your local utility), and your pricing zone. (over)

4 Capacity Pricing Charts for PJM Zones The following chart illustrates where capacity prices have been and where they re going between now and The plotline for the Duke pricing zone includes AEP, Allegheny Power, ComEd, Dayton, and Duquesne whose trajectories overlap h Duke s. The First Energy plotline (which includes all First Energy utilities) stands alone and is indicative of the larger capacity rate increases behind that pricing zone. 4 The effects of the CSAPR can be seen in prices from 2015 forward. (next page)

5 Capacity Pricing Charts for PJM Zones The following three charts outline where the capacity prices have been and where they ll be thru next year in the PJM pricing zones that will be most impacted by the upcoming rate increases. The zones are split in these charts (different from the first chart) to provide a closer look at prices by zone. 5 (over)

6 6 (next page)

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