Q&A: As Virginia's Utility Rates Rise, What Can Businesses Do About It?
Customers of Virginia’s two largest utilities are facing an increase in rates that make up a considerable amount of their electricity bills—raising concern about how such an increase will affect the bottom line and what options are available to mitigate the impact.
For insight into what exactly is behind the rise and what customers can do in response, we spoke with Brian Perrone, a Principal Energy Analyst for Enel X North America who focuses on Virginia's electricity and natural gas markets.
Q: So what exactly is driving up energy costs for utility customers in Virginia, and when can businesses expect to see this increase on their bills?
In Virginia, customers of both Dominion Power and Appalachian Power are seeing a 14% increase in fuel rate in 2018, which can make up about 40% of electricity spend for utility customers. Utilities impose fuel factor charges to recover their generation and transmission costs, which can be sensitive to energy price fluctuations. Any time prices change significantly—for example, as a result of extreme weather conditions seen in the winter of 2018—utilities pass the subsequent costs onto their customers regardless of their usage pattern.
Dominion’s fuel factor increase began in July 2018 and will run through June 2019, while Appalachian Power’s increase will take effect November 1 and will run through October 31, 2019.
Q: What can businesses with large energy spend do to avoid the increase in costs?
At the same time that the utilities are implementing these increases, market prices have been going down. This creates an opportunity for customers to lock in more favorable agreements and establish longer-term contracts to avoid the cost variability of the utility rates and riders. Dominion customers are typically seeing 5% to 10% savings compared to the current tariff rates by procuring power from third-party suppliers.
Other strategies, such as capacity management, can further reduce market-based supply rates. The PJM capacity market is based on five coincident peak hours during the summer, while utility tariffs bill customers on their monthly peaks, which can be difficult to avoid. This means that customers who can temporarily reduce demand levels at certain intervals can reduce the capacity component on their electricity bill for the following year. In Dominion, customers can save about $35K per year for every megawatt they can curtail, while Appalachian Power customers can save about $159K per year per megawatt.
Any Dominion or Appalachian Power customer that has a monthly demand above 5MW is eligible to move to a third-party electricity supplier. New suppliers are coming into the market as customers begin to migrate to third-party supply, and though the market in Virginia is just becoming active, the market in PJM is mature, and suppliers have multiple product offerings at the ready.
Third-party suppliers can offer more flexibility, risk-management tools, and renewable energy options than the utility tariff structures allow. More importantly, customers are billed on their actual load and demand profiles, and not on a tariff structure designed to recover costs across a rate base, which leaves some customers to subsidize others.
Enel X has worked with all the suppliers in Virginia and is currently working to bring others into the market to compete for our customers’ business through RFPs.
Q: Is it true that the utilities are offering discounts to their large customers? Would the discount take care of this problem?
Dominion Power has offered a 2% discount to its base rates for customers that commit to purchasing electric supply from Dominion for three years. However, Dominion customers should know that this discount does not account for riders and adjustment charges, which make up more than 50% of a customer’s bill. When accounting for that, the discount amounts to less than 1%. By comparison, market prices are 5% to 10% below Dominion rates in many cases.
Q: What about customers with sites smaller than the 5MW minimum? What can they do?
If an individual site does not meet the 5MW threshold, those with multiple sites that add up to 5MW can apply with the Virginia State Corporate Commission (SCC) to aggregate that load and buy their supply contracts from the market. This process can be a little bit complex, but Enel X will walk customers through the application process and submit information to suppliers so they can take advantage of their options in the competitive supply market.
Beyond the competitive supply market, businesses have a number of other options available to help them reduce energy spend. Demand response payments, for example, can significantly offset an increase in energy spend.
Often in these cases, businesses are just unaware of the options available to them. When external factors like the fuel rate increase threaten to drive up energy spend, it’s important to explore all potential options.