Commercial Electricity Rates
Contents
- 1 Commercial Electricity Rates
- 2 Factors that Affect a Company’s Electricity Rate
- 3 Demand Patterns
- 4 Load Factor
- 5 Annual Usage
- 6 Understanding the Electric Bill
- 7 The Components that make up the Supply Charge
- 8 What is the Price to Compare?
- 9 How to Calculate the Price to Compare
- 10 Read the Terms and Conditions before Signing a Contract!
- 11 Contract Length
- 12 Rate Product Type
- 13 Cancellation Fee
- 14 Band-Width Swing
- 15 Is my State Deregulated?
- 16 Electric Suppliers
- 17 Utility Companies
If you’re a small or large business, you may soon find out that shopping for commercial electricity rates is a little different than residential rates. Residential electricity rates advertised by Retail Energy Providers (REPs) tend to be a “one size fits all,” while commercial electricity rates are customized based on the business’s meter. There are a variety of factors that will affect the price a business will pay for the supply rate section of the electric bill. Knowing these factors and how it can change the price will help you find the best energy plan for your business.
Energy deregulation is opening up the markets to more Retail Energy Providers which is good news for commercial companies shopping for a lower rate. The high level of competition present in free-market competition has the effect of pushing down prices. With more energy suppliers offering services, commercial companies have now more energy plans to choose from. Selecting the right energy plan can slash your energy bill in half. Commercial electricity rates are lower in deregulated markets than regulated markets.
Factors that Affect a Company’s Electricity Rate
As mentioned above, there is no “one size fits all” when it comes to commercial electricity rates. Company A may end up getting a much lower supply rate than Company B who is located right across the street. Understanding the factors that affect electricity rates can help you make changes to assure you’re getting the lowest rate possible.
Demand Patterns
A company’s demand patterns can have a huge impact on the price they will pay for electricity. Demand patterns measure the flow of electricity to the business during a billing cycle. The more consistent the flow, the easier it is to predict the company’s demand. A company that has a consistent flow on a day-to-day basis will tend to receive much lower pricing from energy suppliers than a business who’s flow fluctuates.
Churches are a prime example of an organization with poor demand patterns. With most churches operating on Sunday, demand significantly increases during this time while dropping off the rest of the week. The sharp fluctuation in demand will prevent most energy suppliers from offering services to churches or the church will be charged a very high premium.
Load Factor
The load factor is a formula calculated by the energy suppliers to determine a company’s demand patterns. A company with a load usage of less than 30 percent is considered poor. Energy suppliers may not offer to price a company with a load factor of than 30 percent. A company with a load factor higher than 50% will receive very competitive pricing.
The load factor is correlated to a company’s demand patterns. For a company to improve its load factor it must improve the consistency of electricity that is flowing to its business on a day-to-day basis. Being conscious of the flow of electricity can have a huge impact when it comes to the price they pay for electricity.
Annual Usage
This may be no surprise that the annual volume of electricity a business consumes can have a huge impact on the price they pay for electricity. Large industrial size users will receive much lower rates from energy suppliers than a small commercial company. Depending on the type of business you’re running, you may not consume a large amount of electricity.
If you’re a small business with multiple properties it may prove beneficial to aggregate all the meters and shop them out as one entity. Aggregating the meters will increase your usage and most of the time the energy suppliers will offer a lower rate. However, if a few properties have poor demand patterns this can negatively impact the price. If this is the case the company will be better off pricing the meters individually.
Understanding the Electric Bill
Before you start shopping for competitive electricity rates it is important to understand the regulated and deregulated portion of the electric bill. In deregulated energy markets the generation cost, commonly referred to as the supply charge, became “unbundled,” opening the door for Retail Energy Providers to compete for your business.
- Delivery Charge – The delivery charge represents the regulated portion of the electric bill. This is the cost the Local Utility Company (LUC) charges to its customers for maintaining the lines and wires used to deliver the electricity to the point of service. The utility company is responsible for resolving any power outages or damages done to the power lines during bad weather. The customer will not be able to change their utility company for the delivery charge portion of the electric bill.
- Supply Charge – The supply charge represents the deregulated portion of the electric bill. The supply charge is the cost of generating the electricity a customer is estimated to use during the term of the energy contract. Thanks to energy choice, a business can shop around for a lower supply rate and significantly reduce their costs.
The Components that make up the Supply Charge
The major difference between shopping for residential or commercial rates is for the customer to understand the components that make up the supply charge. Rules and regulations better protect residential customers from hidden fees. However, commercial customers are expected to be more competent when choosing an energy supplier. This gives the energy suppliers more wiggle room to make the supply rate lower than what it is.
It is not uncommon for energy suppliers to offer commercial customers a supply rate that does not include all the components of the supply charge. They will bypass some of these charges onto the electric bill. If the customer is not reading the terms and conditions of the energy contract carefully, they may be in for a big surprise when the electric bill comes in.
Here are just a few components of the supply charge. When comparing energy providers and their rates it is important to ask for the price to compare rate. The price to compare rate will assure you are reviewing an apples-to-apples comparison from all the energy suppliers.
- Energy Charge – The energy charge is the commodity itself. This will be the charge for the electricity the company will use during the billing period.
- Congestion Charge – The congestion charge arises from higher generation costs that may occur due to constraints on the power system.
- Line Losses – This charge stems from the loss of power that inevitably occurs on the power lines when delivering electricity from point a to point b.
- Ancillary Services – Ancillary services can be considered the overhead costs of maintaining the lines and wires to safely deliver the electricity to the point of service.
- Capacity Charge – This charge is based on the company’s peak demand during a billing period. This charge assures the electricity is there when you need it.
- Transmission Charge – This is the charge to deliver the electricity from the generation facilities to the electric distribution system.
- GRT/SUT Taxes – This represents the gross receipts tax or sales and usage tax, depending on which state you reside in. These taxes are charged to the energy suppliers by the state which is then passed onto the customer.
What is the Price to Compare?
The price to compare is the default rate that utility companies charge their customers who have not already switched over to a competing supplier. Most deregulated states will require the utility company to act as the supplier of last resort and provide the generation costs to residents who are not with a supplier. The price to compare includes all components of the supply charge. A company shopping for a supply rate should ask the energy supplier for the price to compare rate. This will assure the rate will include all components of the supply charge.
Most utility companies will include the price to compare rate. This will make it easy for customers when shopping around for a new supplier.
How to Calculate the Price to Compare
If your local utility company does not include the price to compare on the bill there is no need to fret. This number can be easily calculated. To find out what the price to compare is, take the total supply charge and divide it by the total kilowatt-hours used during the billing period. For example, if the supply charges on the bill came out to $12,000, and the customer consumed 100,000 kilowatt-hours during the billing period, then the customer is paying a supply rate of 12 cents per kWh.
Read the Terms and Conditions before Signing a Contract!
Not all energy agreements are equal and signing a contract without reading the terms and conditions can be costly for a business. The terms and conditions will layout factors such as contract length, rate product type, cancellation fees, and other variables that may affect the final price a business pays each month for electricity.
Contract Length
The most common term lengths are the 12, 24, and 36 months agreements. The length of the contract is mostly based on individual preference. If the energy market is low, it may make sense to lock in a longer-term rate. This will protect the customer against any volatility in the energy market for the term of the agreement.
Rate Product Type
The most common rate products for a small business are the fixed and variable rates. Depending on the customer’s risk tolerance, other rate products such as the index product can save a company a tremendous amount of money but require a higher degree of management oversight. Index products tie the rate directly to a commodity such as natural gas so the customer will essentially be floating the market.
| Electric Rate Products | Pros | Cons |
|---|---|---|
Fixed Rate |
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Variable Rate |
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Index Rate |
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Renewable Energy Rates |
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Cancellation Fee
Most energy agreements will come with a cancellation fee. Depending on the rate product, a business can get the cancellation fee waived. For example, variable rates tend to be a month-to-month charge. Canceling a variable rate will not cause great damage to the supplier.
This does not apply to long-term fixed rates. The energy supplier purchases the estimated amount of electricity the company is estimated to use upfront, in the form of future-forward contracts, and sells it back to the company. This is what allows for the rate to be fixed. If you switch energy suppliers before the expiration of the energy agreement you can expect to pay a steep cancellation fee.
Band-Width Swing
It’s common for energy agreements to include a band-width swing as part of the supply rate. The customer is estimated to use a certain number of kilowatt-hours each month, which is based on historical usage. Most energy agreements will come with a 100% swing. However, it’s possible for an energy supplier to only offer a 10% swing. This means if a company uses more or less than 10% of the number of kilowatt-hours they are estimated to use, they will be hit with additional charges. We always recommend a 100% swing.
Is my State Deregulated?
A business has an advantage in living in a state that is deregulated. Commercial electricity rates tend to be lower in deregulated states. This should be no surprise given the fact free-market competition drives down prices. Below is a chart showing a list of states that can benefit from energy choice.
| State | Electricity Deregulated | Natural Gas Deregulated |
|---|---|---|
Alabama | No | No |
Alaska | No | No |
Arizona | No | No |
Arkansas | No | No |
California | Yes | Yes |
Colorado | No | Yes |
Connecticut | Yes | Yes |
Delaware | Yes | No |
District of Columbia | Yes | Yes |
Florida | No | Yes |
Georgia | No | Yes |
Hawaii | No | No |
Idaho | No | No |
Illinois | Yes | Yes |
Indiana | No | Yes |
Iowa | No | Yes |
Kansas | No | No |
Kentucky | No | Yes |
Louisiana | No | No |
Maine | Yes | Yes |
Maryland | Yes | Yes |
Massachusetts | Yes | Yes |
Michigan | Yes | Yes |
Minnesota | No | No |
Mississippi | No | No |
Missouri | No | No |
Montanna | No | Yes |
Nebraska | No | Yes |
Nevada | No | No |
New Hampshire | Yes | Yes |
New Jersey | Yes | Yes |
New Mexico | No | Yes |
New York | Yes | Yes |
North Carolina | No | No |
North Dakota | No | No |
Ohio | Yes | Yes |
Oklahoma | No | No |
Oregon | Yes | No |
Pennsylvania | Yes | Yes |
Rhode Island | Yes | Yes |
South Carolina | No | No |
South Dakota | No | Yes |
Tennessee | No | No |
Texas | Yes | No |
Utah | No | No |
Vermont | No | No |
Virginia | Yes | Yes |
Washington | No | No |
West Virginia | No | Yes |
Wisconsin | No | No |
Wyoming | No | Yes |