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New Yorker – This is what you pay for Electricity!

So, you live in New York and want to know what you’re paying for electricity?  Good luck!

Power2Switch recently launched our services in New York.  And, as part of the service we provide for our customers, we display your utility’s Price-To-Compare so that you can compare the rates on our site against the rate for electricity you’re currently paying.  This way, our customers get an apples-to-apples comparison of their electricity rate, and they gain a better understand of the plan for which they are signing up.

In most other states, the Price-To-Compare can either be found on the utility’s web sites (like in New Jersey), or on a state run website that provides the Price-To-Compare for all utilities (like in Illinois, Ohio or Texas).  In most other states, these Prices-To-Compare may change every few months, but are typically in the same ballpark over the course of a year.  (The biggest change occurs once per year because the utility or provider of last resort submits new supply tariffs about once per year.)  So, as a customer, you can look at the Price-To-Compare, and get a good sense of what your electricity rate is with the utility, and get a sense of how much you’ll pay for electricity if you choose one of the alternate plans.

Unfortunately, this is not the case in New York.  In New York, the Price-To-Compare changes on a monthly basis because the underlying supply rate that makes up the largest portion of the Price-To-Compare is based on the wholesale price of electricity for that month.  (Additionally, some of the other components of the Price-To-Compare also vary on a monthly basis.)  The enviable job of determining exactly what that Price-To-Compare for electricity was in New York fell squarely on my shoulders.

So, listen up New York!  I’m only writing this once!  If you read this article, you might actually understand how much you’re paying your utility for the electricity you use.

Market Supply Charge

The largest component, and the most variable component, of the Price-To-Compare is called either the “Market Supply Charge” or the “Service Supply Charge” depending on your utility.  Per ConEd, “the Market Supply Charge rate per kWh includes the total cost of energy based on NYISO day-ahead market prices (which are load-weighted by the rate class’s hourly load shape and adjusted for losses)…”  And, unless you work in the electricity industry, you may have had a better chance understanding that in French.  So here goes:

“la Charge du Marche d’Alimentation pour chaque kWh inclus the cout complet d’energie base sur les prix du prochain jour du march de NYISO (qui son adjuste a base de la demande horaire pour chaque classe to consumateur et adjuste pour les pertes)…”

Was that any clearer?  I’m guessing not, so let me break it down for you, piece by piece.  NYISO, or the New York Independent System Operator, operates the transmission grid for the state of New York.  The transmission grid connects the local electrical grid for each utility to each other and to power plants all across the state.  NYISO also operates the wholesale day-ahead and real-time hourly markets.

Let me take one quick step back to explain how electricity is bought and sold.  There are three ways that this happens.  The first is a long term contract where the buyer agrees to purchase a certain amount of electricity from a power plant over many years.  The second is a short term contract where the buyer agrees to purchase a certain amount of electricity from a power plant over a period of months.  The third is the wholesale market which allows people to buy and sell electricity in one hour increments.  There are two actions that run on the wholesale market every hour – one is for electricity for that hour, and one is for electricity for the hour that is exactly 24 hours from now.  (If you would like to know more about how these wholesale markets operate, feel free to check out this blog post I wrote specifically on the topic: https://power2switch.com/blog/history-of-the-electricity-world-part-ii-wholesale-markets/)  Think of the wholesale market as the New York Stock Exchange, with one very significant exception, unlike stocks, you can’t hang on to electricity for the next hour.  If you don’t buy what you need, someone is going to have to live without electricity for the hour.  If you don’t sell all that you have, then you miss out on selling that product forever.  Because of how this trading floor is set up, it begins to look an awful lot like the supply and demand graph from your Econ 101 class – where supply just matches demand at a market clearing price.  Supply gets reduced in real time because for some power plants, the marginal cost of the fuel exceeds the value of the electricity to be sold, so the power plant is idle for that hour.

Now that we understand this, we can determine which rates the Market Supply Charge is based on.  If you go to the NYISO website, it is possible to download the day-ahead wholesale electricity price for your zone.  (Here’s the link to the real-time price map so you can check out the current wholesale electricity prices in your area, just in case you’re interested: http://www.nyiso.com/public/markets_operations/market_data/maps/index.jsp)

But, the Price-To-Compare is a single value, and the wholesale day-ahead market rates provide one price for each hour of every day.  How do your convert all those prices into a single price?

This is where the “load-weighted by the rate class’s hourly load shape” comes in.  Each customer class has what’s called a load shape or a load profile.  It’s the average hourly usage by all the customers in that class.  The utility takes the average usage in kWh for a given hour on a given day, and multiplies it by the wholesale rate for that hour on that day.  It then proceeds to do this for all the hours of all the days in the entire month.  The utility then sums all these values and divides it by the average usage during the month to determine the Market Supply Charge.  Luckily, we don’t have to do all of this math – the utility does it for us.

Why Does It Change?

So, if it’s calculated the same way every time, why does the Market Supply Charge change from month to month?  The Market Supply Charge changes from month to month because the day-ahead wholesale price of electricity changes from hour to hour.  Go back to your Econ 101 supply and demand graph.  Both supply of and demand for electricity change on an hourly basis.  Because both lines are moving, the price will fluctuate as well.

Let’s take a quick look at the demand side.  If you look at your own habits throughout the course of a day, you’ll see that you’re not always using the same amount of electricity.  For instance, if you’re sleeping, I’d guess that the lights are off, the TV is off, and you’re not surfing the internet on your computer.  But, as soon as you wake up in the morning, you turn on the lights, and use more electricity than when you were sleeping.  Once you’re at the office, think of all the electricity that gets used – the HVAC systems turn on, many more computers are operating as we all try to get our work done, and so on.  Once we all get home, we’re still using electricity, just not as much as in the middle of the day.  So, your daily electricity usage is low overnight, ramps up in the morning, peaks in the late afternoon (that’s when the HVAC systems are really working), and decreases slowing until you turn off the lights at night.  Now multiply that out by the number of people that live in your town.

From a supply point of view, they have to respond to all these changes in demand throughout the course of the day.  There are many, many power plants on the New York electrical grid, but for clarity’s sake, let’s assume that there are only three power plants.  The first is a nuclear power plant, the second is coal power plant, and the third is a natural gas power plant.  The nuclear power plant has no fuel cost, the coal power plant has a medium fuel cost, and the natural gas power plant has high fuel costs.  So, when it’s night time and the demand for electricity is low, the entire demand can be served by the nuclear power plant.  Since its operating costs are low, the price for electricity is low.  When morning comes around, the demand for electricity exceeds the amount that the nuclear plant can provide.  But, since the fuel cost for the coal power plant is higher, the price that the coal power plant gets paid for electricity has to be enough for them to turn the power plant on.  So, the price in the morning is higher than it way overnight.  As the demand for electricity peaks in the late afternoon, the demand exceeds what the nuclear plant and the coal plant are able to provide.  But, since the fuel cost for the natural gas plant is higher than the coal plant, the price that is given to the natural gas plant has to be even higher still.  This means that electricity in the later afternoon is the most expensive.  As we go further on in the day, demand will decrease, allowing the natural gas plant to turn off, and the price of electricity to go down.  And as night hits, demand will decrease again, allowing the coal plant to turn off, and the price of electricity will go down again.

At a high level, that just covered how the wholesale market works.  In reality, there are many more power plants than just the three we discussed leading to many more steps during the day, there are many more types of power plants (wind, solar, biomass, hydro, etc.) than we discussed, and the prices of coal and natural gas fluctuate as well causing additional disruptions in the market.  (It’s currently cheaper to operate a natural gas plant than a coal plant, so the natural gas plant would have turned on before the coal plant.  But, this is a phenomenon that has arisen only in the last 18-months, so I decided to stick with the old formats.)

There is one additional subtlety to keep in mind with these markets and those are transmission constraints and transmission losses.  The supply (power plants) is connected to the demand (you) via wires.  These wires have a limited amount of electricity that they can “transport”.  This capacity changes due to the physics of electricity and the metals used for those wires.  At any one moment, the more electricity that is pushed through these wires, the more of the electricity will be lost to resistance on the wire.  The electricity lost to resistance on the wire becomes heat, which in turn increases the amount of electricity that will be lost on the wire in the next moment.  It’s a vicious cycle.  It also means that the wires have a lower capacity in summer, when it’s warm out.  But, the wires have a higher capacity in winter, when it’s cold out.

Why Should You Care?

The point of all of this was to give New Yorkers an understanding of how much their paying for electricity.  There are really three parts to the equation – the price, your usage, and time.

From a price point of view, it’s defined by the wholesale markets based on the day-ahead rate… blah, blah, blah.  What you really need to know is the factors that affect the price you pay on your bill.  As people use more electricity (demand), it will require more expensive power plants to come on-line (supply).  So, as you and your neighbors use more electricity, the price for electricity will go up.  Additionally, this demand / supply / price relationship will be more significant in the summer because the heat will cause more electricity to be lost on the wires.  Throw in the extra demand due to the AC units that are running more, and you can start to see why your electricity bill in July and August can be just awful.

New Yorker – this is what you pay for electricity!  It’s complex, difficult to follow, and you’ll only know what you’re going to pay for it after you’ve already used it.  (Sound completely fair, right!)  But, you have a choice.  Now that you know what you’re comparing to, it may not be a bad idea to see if there’s a better deal out there for you. 

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