As a business, you are faced with rising energy costs. These increases drag your budget and make it difficult to plan for the future.
As a business, you may be interested in leveraging solar to help manage your future electricity rates. However, solar systems only answer some of your energy challenges.
Long-Term Trends
Electricity prices will likely rise further this year as companies’ operating costs continue to soar and more liquified natural gas, an essential fuel for power generation, is exported overseas. In the meantime, the nation’s coal-fueled electricity generation capacity is waning.
Utilities must revamp their rates to remain competitive and secure the future of electric power generation and distribution. They can do this by matching a fixed-charge component (a set monthly fee) and a demand-charge part (a payment per kilowatt peak) to actual grid costs. This would ensure that customers are motivated to invest in distributed energy resources, like behind-the-meter storage when these resources are economically efficient.
These rate components help utilities accurately reflect the cost of providing reliable, 100-percent-renewable service. They could also motivate distributed generators, microgrids, and other equipment that would give resilience to critical systems.
For example, hospitals and manufacturers that want heightened reliability can pay for it by enrolling in add-on tariffs that would cover the utility’s costs to provide additional backup power, including extra generators, microgrids, and advanced distribution management systems.
Meanwhile, businesses that value low-carbon energy sources can shift to third-party suppliers. Many companies like the lowest electric rates in Texas are already doing so. Consumers can also make good use of energy comparison websites to find who has the best energy rates in Texas.
This transition will create significant challenges for utilities. They must develop new pricing and offerings to retain existing customers and attract new ones. Customers will increasingly work with third-party providers to meet their evolving needs if they still need to.
In the past, utilities used a volumetric rate structure that charged customers based on a set kilowatt-hour of use. This model served customers, utility companies, and the policymakers who designed the regulatory framework. It also provided stability needed to recover costs and invest in capital projects without rate hikes.
Short-Term Trends
The short-term trend in electricity rates is an essential indicator of how much energy will cost consumers over the next few years. This trend varies significantly across markets.
Among the most frequent drivers of short-term price changes are variations in demand (e.g., weather or economic activity), fuel price changes, and unexpected supply shocks. Electricity price forecasts are generally made using fundamental, market-based models that describe the dynamics of wholesale markets.
Electricity prices are determined by auctions conducted between generators of electricity and distributors of electricity, with generators submitting selling bids equal to their marginal cost of generating electricity. Distributors then submit their demand levels to the auctioneers, who determine the wholesale price charged to customers.
These prices differ based on the region they are set, although they typically move in tandem with retail power prices. For example, in the East North Central region of the United States, where coal-fired plants were displaced by natural gas and renewable generation, wholesale electricity prices have risen gradually over the past decade.
The transition from coal also influences the wholesale power price in regions with a high concentration of coal plants. While this trend has slowed since the beginning of the decade, it is expected to continue for several years.
While the short-term trends in the price of electricity are primarily predictable, long-term trends are more complex. They are mainly driven by factors such as shifts in demand, technological development, changes to market structure, and policy decisions.
Data-driven models are used to predict the future evolution of the electricity price by coupling a regression model trained on historical values of the price drivers and a market-based model that uses price predictions from the regression model. The latter can anticipate long-term variations in the relationship between the price drivers and the electricity price and can be used to make medium-term and long-term EPF forecasts.
Medium-Term Trends
Wholesale power market prices drive electricity generation prices. These are the rates that generators pay to buy their electricity in competitive auctions or bilateral contracts. The generators’ prices at these auctions are then passed on to utilities and other power distributors, who sell the electricity for use by residential, commercial, and industrial end-users.
These prices vary from year to year, reflecting a variety of factors, including capital investment and plant retirements, fuel costs, and shifts in demand. Changing prices also reflect changes in the mix of generation sources, including natural gas, which has become the dominant fuel in most markets.
New England’s transition from coal to natural gas has significantly driven lower wholesale prices. Natural gas has accounted for more than half of the region’s power generation over the past 14 years.
The shift to natural gas has primarily been supported by the shale gas boom, providing an inexpensive domestic fuel supply. Nonetheless, this shift has been coupled with the emergence of renewable power as a significant share of total electricity production.
For example, wind and solar energy are increasingly popular in the United States. These resources have a low carbon emissions profile and are highly efficient at generating power. Moreover, they can also be used to provide backup generation in case of an outage.
However, these technologies come with high upfront costs. Therefore, finding ways to offset these costs and reduce the impact on prices and end-users is essential.
One way to do this is by adjusting rate structures. Historically, utility rates have bundled all electric services into a single volumetric rate that charged customers by kilowatt-hour of use. This approach has served all stakeholders well.