Determining the Weighted Average Cost of Power

In the following pages, three electric rate examples are discussed. To keep the analysis manageable, certain billing factors, such as customer charges, taxes, and power factor, have been excluded. These examples, which represent typical industrial, institutional, and large commercial electric rate structures and clearly demonstrate the relationship between varying consumption load profiles and electricity costs, are based on the following three rate structure types:

• Rate 2: A conventional seasonal (CONV) rate

• Rate 3: A four-tier seasonal real-time pricing (RTP) rate

The three rates presented here are representative of current rates in many parts of the country (between $0.05 and $0.06 per kWh for baseloaded usage, inclusive of demand charges). However, they should not be used to evaluate specific technology applications. One must always use the rates charged by the local utility. It must be noted that electric rates vary dramatically across the country. In fact, neighboring utilities in the same state often have significant differences between the types of rates offered and rate levels. These differences will likely increase as the utility industry continues to undergo restructuring. While all three rates have fairly similar costs for baseloaded usage, they have very different structures.

Rate 2 is referred to as a conventional electric rate because it has historically been the most common type of rate. It is, however, being increasingly replaced by TOU-differentiated rates designed to send market price signals that shape consumer usage patterns and better reflect the cost to serve. Because the usage charge per kWh does not vary with time of use and because peak demand charges are more moderate, Rate 2 price signals do not strongly drive usage away from peak periods or attract usage in off-peak periods to the extent TOU rates do.

In the two standard (i.e., Rate 1 and 2) rates, a demand charge combines generation, transmission, and distribution system capacity charges, although each is charged separately in many rate structures. Many TOU rate structures will use varying demand charges in each rate period. In addition to peak demand charges, this TOU rate charges for excess demand in off-peak periods. The peak usage charges also include some allocation for capacity costs. But, in many rate structures, costs between peak and off-peak usage are not nearly so differentiated. In those rate structures, a larger portion of the various capacity costs are embedded in demand charges. Rates 1 and 2 have demand ratchets, which can only be set in summer months, as part of their seasonal differentiation. Many rate structures do not have ratchets and some have ratchets that can be set in any month. The RTP rate combines all capacity and commodity costs into usage charges, differentiated by four rate periods.

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