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How we pay for electricity

Guest View

January 9, 2013
Ed Sadler - City Manager, Webster City , The Daily Freeman Journal

Just what goes into figuring how much we pay for electricity? Currently, we pay for electricity based on three things: 1) Energy charges, or the kilowatt hours (KWH) that we use, 2) the energy demand and 3) the transmission demand. In days gone by, we also used to pay for something called "Price Cost Adjustment" (PCA) which went up and down based on the cost of fuel (in our case, the price of coal), but there is no longer a separate charge for this item. Now, just what are these three items we are paying for?

1) Energy charges (Kilowatt hours): This is how our wholesale provider measures the total amount of electricity that we (and therefore you) have used in a month's time to run all of the electrical items in your home or business. This is the unit of measurement that your meter records. This amount mainly goes toward paying for the operational costs of providing you electricity and covers such things as salaries, fuel, and etcetera. This charge usually amounts to just under 50 percent of what we pay each month to our wholesale provider.

2) Energy Demand: This gets much more complicated. Every electric system that serves the public is subject to a demand, or load, that varies from hour to hour, day to day, and season to season. The demand, which is expressed in kilowatts (not kilowatt-hours), is a measure of the rate of electric usage. Demand can be affected by the number of hours of daylight, temperature extremes, and seasonal activities such as crop drying.

The higher the total demand, the more it costs a utility to serve its consumers because more expensive generation sources need to run to keep up with the demand. Demand charges cover "fixed" costs, such as capital costs, financing and other firm business costs.

Each month when the wholesale provider hits its highest "demand", each user then pays its share of the monthly demand based upon the use for that hour increment. So, if Webster City is using 7 percent of the power during the half- hour period, it pays for 7 percent of those total monthly costs.

3) Transmission demand is pretty much the same as energy demand, but rather than paying for generation related demand costs, transmission demand costs are just that, the fixed costs for the lines and equipment that transmit the power to your location. Combined demand charges amount to just over 50 percent of what we pay monthly for electricity.

Just for the sake of discussion, let's look at a simple example of how this might work on a monthly basis: It is August and it is hot and dry, but it is still daylight savings time and so the sun it still shining until late into the evening. On average, during the day, the wholesale system is using about 200 MW of power while most people are at work. Webster City is using 6 percent of that amount, and therefore about 12 MW. To provide this power, the wholesale company is using three large coal fired power plants and it is using the oldest of the power plants because they are the cheapest to run because they were the cheapest to build. Power plants built today will cost several times more than what it cost to build the same sized power plant 10 years ago.

More demand

The end of the work day comes and everyone goes home and turns down the thermostat to kick on the AC. They turn on the TV, put in a load of laundry and start cooking supper. Everyone across the system does the same and all of a sudden, the wholesale provider has to fire up two more power plants to meet the "demand" which has now exceeded 300 MW. The two power plants being fired up are newer and their fixed costs are greater. The system reaches its peak demand for the month at 6 to 6:30 that evening (Friday, Aug. 12) at 330 MW and Webster City is using 7 percent (over 23 MW) of that total demand. Webster City now pays 7 percent of the total fixed costs for the month of August. When that peak is met each month is not known until the end of the month when all of the usage numbers are calculated, and it is based on the "system" peak, not the Webster City peak. We have peaks and valleys each day, but the demand charges are based on the highest peak each month and the System is built to meet those peaks so that the system does not experience brown outs or black outs. Just worth noting, at 3 a.m., the system usage is probably about 75 MW when all of the lights are turned off and most are sound asleep, and that power is very cheap and excess power is being sold cheaply into the grid.

Now it gets even more complicated. How do we charge customers to recover these costs? Commercial and residential meters show us the total KWH used, but gives us no idea of exactly who was using how much power at 6 to 6:30 on Aug. 12. The dozen or so big industrial users have expensive demand meters that measure this usage, so they are billed directly for what power they were using at 6 to 6:30 on Aug. 12, but what about the rest of the demand charges? To an extent, we guess. Based upon our past experience, we estimate how much of the actual demand charges were unaccounted for by the big industrial users and we build the KWH charges so that we hope this revenue is sufficient to pay for the demand charges each month. That is how we arrive at the 8.3 cents per KWH that we charge residential and commercial customers. The time of the peak demand as noted earlier changes due to length of daylight, seasons and temperature to name just a few things that affect it, so it isn't always in the early evening. Sometimes it is in the morning as everyone is getting ready for work or just getting to work. Sometimes it is during the week and other times it is on a hot Sunday. What we can tell you as that like the example above, Webster City consistently utilizes more of the demand than we do of the total energy (as in the example with 6 percent of the energy charges and 7 percent of the demand charges). This does make our electric costs slightly more expensive than others buying electricity from the same wholesale company. In other words, when the big demand hits the system, we in Webster City seem to consistently have more things turned on than the rest of the users in our area, so we pay slightly more.

Measuring the demand

In the future, I believe that all electric users will have meters capable of measuring demand. If nothing else, I believe that the federal government will require this as they try to insure the wise use of electricity and also try to avoid brown outs and black outs while ensuring everyone has the electricity they need. At that point, users will pay for electricity based on demand and those users who insist on using electricity when everyone else is will pay 4 to 5 times as much for that electricity as those who chose to run the clothes dryer at 3 a.m. New appliances are preparing for this day. They are already more energy efficient. There are already appliances out there that will cycle on and off based on the signals sent through the electric lines indicating whether the "demand" is high or low. There are appliances that can be set to come on at a later time so that dishes are washed at 1 am.

You can do those things right now. They may not affect your bill directly, but if everyone used less electricity during those obvious peak times, the City could lower its percentage of total demand and that would allow us to lower the rates for everyone. You should start thinking about this now, because soon I believe you will be forced to in order to control your electric costs.



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