..and How it Compares to a Market Index Price

This post discusses recent analysis conducted by The Megawatt Hour that confronts the conventional wisdom that over a 12 month term Con Edison default tariffs will always cost about the same as a market index.

First, some definitions.

The Con Edison default rate is, essentially, a market index rate. The rate has an energy component which includes losses and ancillary services. For demand-billed commercial customers there is also a capacity charge (capacity is rolled into the energy charge for small customers). There are monthly adjustments used to true-up prior month’s charges. Finally, there is a merchant function service charge.

An index rate provided by a supplier or ESCO typically passes energy through to customers and can either fix other components (ancillary services, capacity, losses, etc) or pass some or all of them through to customers.

The Con Edison Tariff Rate differs from the market index in a few ways:

• Con Edison forecasts the expected energy price for customers in order to calculate the energy component of the default rate. Then, in the following month, Con Ed applies a true-up based on actual market costs. (This adjustment can cause a mismatch between market-based indices and the Con Edison default rate in any one month. Practically speaking, it can also cause greater volatility and even less predictable budget numbers.) ESCOs typically bill customers for the cost the customer incurs within 30 days of the index (energy, capacity, ancillaries) clearing in the market. This is a more immediate and direct reflection of index costs; most ESCOs do not pass through any subsequent adjustments to market costs.

• The Con Edison tariff uses a different calculation of capacity costs than the market indices. ESCOs/suppliers use a customer’s installed capacity obligation to calculate capacity costs, because that is what ESCO’s must pay to generators/the ISOs on behalf of their customers.

The generally-accepted wisdom is that it is difficult for a market-index to “beat” a Con Edison default rate tariff. In theory, the costs of both rates should be the same over a period of 4 months or more (or at least after all Con Edison tariff adjustments have run through).

Extensive analysis by The Megawatt Hour reveals that this is not, actually, always true. There are some customer accounts that can consistently “beat” the Con Edison default rate and should, at the very least, take an index tariff rate rather than remain on utility default service. The Megawatt Hour is able to forecast with reasonable certainty whether a utility account will “save” over a utility default tariff.

Bottom line for businesses: Make sure you review all your options before you make assumptions about the best product for your business. Using data and having transparency improves decision making.