Summary

An outgrowth of the developing self-generation and wheeling market is the breakdown of vertical integration in cost allocation. T&D charges are being detailed explicitly in many rate designs. This is part of the overall process to more clearly define cost causation and to apply these principles to cost recovery with greater precision.

The infusion of competition into the electric genera tion industry is also being fueled by the wholesale (or off-system) sale of power among utilities and the establishment of opportunities for non-regulated EWGs and independent power marketers. The overall goal of EPAct 92 is to allow everyone the opportunity to compete. One of the dangers of the current situation, however, is that EWGs and regulated utility generation facilities may have an advantage over NUGs in access to wholesale markets and transmission services. It will be the responsibility of FERC and local state regulators to ensure that the lowest cost producers, whoever they may be, have equal access to the market.

One solution is to completely separate generation from T&D functions and to have power pools operated by ISOs that are completely indifferent to the source of generation. Electric generation and sale would then become a completely deregulated market activity.

In the future, widespread retail wheeling can dramatically increase competition in the generation market by greatly expanding the opportunities for power sales. By increasing the number of potential buyers, generators can seek the best price for the power they provide, while buyers can use the competition for sales to their advantage by negotiating for lower rates. Already, numerous large corporations have drafted plans to enter into buying and selling electricity, and some are already doing so. As with the deregulation of other industries, the brokering function is expected to play a major role in future wheeling-based transactions.

The trend in the electric industry toward deregulation and open access to transmission services should ultimately lead to a condition under which the sale and purchase of power is driven by free market competition. However, while the model has been established in several other industries, the transition will likely be slowed by several practical concerns — some technical, some economic.

One principle concern in many states is the burden of embedded costs in utility generation capacity that will not be competitive in an open market. This will lead to the so-called stranded investment problem mentioned above, which in some cases could lead to significant financial problems, even bankruptcy, for such electric utilities.

Practical legislative and regulatory considerations regarding allocation of this cost burden to public utility shareholders and/or remaining utility customers will likely result in a difficult transition toward a more competitive market. At some point in time, there may be a complete divestiture of generation by some or many electric utilities, with stranded investments sold at market value with losses absorbed by a combination of ratepayers and shareholders. Since retail wheeling is not yet mandated by federal legislation, the rate of transition toward market-based competition is likely to vary from state to state, though the pace is accelerated as successive states make strides in that direction.

As noted above, the extent to which stranded investment costs are allocated to ratepayers is expected to have a profound influence on the evolution of retail wheeling and on the market benefits ultimately achieved by end-users over the coming decade. In many states, there is serious concern about the financial stability of long-standing electric utilities. This has spawned a willingness among regulators to allow for generous recovery of utility stranded investment. By passing this cost on to the wheeling market in the form of higher T&D service rates, price benefits achieved by end-users may be greatly eroded. This, in turn, may allow utilities to remain price competitive in selling their own native generation or simply offset much of the potential savings achieved by the buyers of free-market power.

Uncertainty about the impact of stranded investments has already given rise to concern among consumers. Some utilities have been able to exploit this uncertainty by spinning off unregulated subsidiaries that are offering long-term, full-service contracts to customers or pools of customers at a modest discount. In some cases, they are offering additional bundled services, such as fuel procurement, since the utility is still seen as a stable entity and many consumers are skeptical about huge savings benefits in the near future.

Such offers may be attractive to some consumers who are content to capture some savings now at the expense of the potential opportunity for greater savings in the future. Other consumers have adopted a wait-and-see approach, believing that the negative impact to ratepayers of stranded investment recovery may be less than currently stated. They are reluctant to enter into long-term agreements for modest discounts and instead choose to let the market settle over time.

Some third parties have also entered into the retail market, offering discounted power as a means of garnering market share in the retail market. While they cannot yet supply power to retail markets, they are signing long-term contracts with consumers for discounted power and using financial instruments to hedge their offers. Some companies are even giving large up-front payments to customers for the right to sell electricity to them at current or slightly discounted rates when and if retail sales are allowed. The marketers view these deals as options, where the customers view them as the monetization of future uncertain savings. While such efforts are viewed as having high risk and may result in large financial loss over the short term, several large firms that have the financial strength to absorb these potential losses have entered into this market.

Regardless of how deeply the stranded investment issue impacts price, the future of electricity prices appears to be one of stratification. The movement toward time-of-use (TOU) rates and other pricing mechanisms, such as realtime pricing (RTP), segments usage into discrete intervals and produces charges that more closely reflect the utility's cost to serve. Peak (hour and season) costs may experience a far greater growth rate than the average cost of electricity. Likewise, off-peak (hour and season) costs may grow at rates lower than the average, or even decrease over time. Facilities with competitive alternatives and/or favorable load profiles should experience lower cost increases than the average, and facilities lacking alternatives and/or with unfavorable load profiles should experience greater increases.

Summer peak demand charges for some utilities are approaching $30/kW per month, while the energy cost of off-peak usage for other utilities is $0.02/kWh or less. Although these are the current extremes, rates across the nation are moving in the direction of increased time differentiation. In areas in which excess capacity exists on the open market, demand charges may remain moderately priced.

The other trend is a movement toward negotiated competitive pricing from the utility as a result of the utility's desire to protect load defection to competitive alternatives and foster economic development. In some cases, it may also improve load factor by maximizing commodity sales from existing capacity, while in other cases, it may result in long-term load growth.

All of these trends point to more competition in the energy market. Competition generally will have a positive effect on the market by forcing competing sources to be more cost-efficient. There remains, however, the potential for market distortions due to the hybrid nature of mixing competition into a regulated industry.

The operative terms for the future electric market are choice and diversity. Facilities that can dynamically control and vary their energy demands through system and source diversity, and/or self-generate electricity, will be more likely to be positioned to take advantage of inter-energy source pricing competition and to be most cost-competitive. Facilities with flexible load shapes and the ability to shift energy use among different time periods, and those that can actively switch between multiple energy sources, will have the opportunity to become active participants in energy-use decisions rather than simply passive energy consumers. Rates for large commercial, industrial, and institutional (CI&I) customers will likely increase less than those of residential and small CI&I customers due to concerns about competition.

Many facilities are increasing their competitive purchasing positions through careful planning of system utilization and the installation of multi-energy-source technologies. Prime mover-driven and heat-cycle equipment, such as absorption cooling, can be installed to allow a facility to operate its electrical demand at near 100 percent load factor (a flat purchased electric load profile), or with an inverted load curve in which peak demand is lower than off-peak demand. Facilities designed along these lines can purchase a varied mix of energy sources in a dynamic, least-cost usage strategy. This can be done through an emphasis on use of off-peak power, or through negotiated competitive energy rates based on the strength of alternative options. These options include both on-site technology applications and alternative retail purchasing options.

RTP type rates may become more common, allowing for purchase of power during specific days, hours, or minutes on a discrete, dynamic basis. These discrete, dynamic pricing mechanisms are anticipated to eventually drive the market as increased competition for retail markets takes hold. Though electricity may still be sold in bundled blocks, the underlying driver will be fierce competition based on instantaneous availability of competitively priced power on the open market.

Utility Rate Structures

Renewable Energy Eco Friendly

Renewable Energy Eco Friendly

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable.

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