Why Resources?

Information does not flow freely from wholesalers, and energy markets to businesses, end-users and consumers. The Megawatt Hour is trying to address the break down in information flows. These Resources provide background information that will help businesses be more-informed consumers of energy. Definitions, below, will help businesses understand energy contracts and markets, using the language of the marketplace.

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What Zone Am I in?

The NY ISO (Independent System Operator) manages energy pricing by load zone. Load zones are divided up based on geographic location. Here is the NY ISO’s Zone Map to help you figure out what Zone you are in.

Load Zones: NY State

Definitions and Explanations

The Megawatt Hour’s Mission

Our goal is to help clients make good decisions about energy: whether it is budgeting your energy costs based on actual price forecasts, determining the right green power option for your business, or finding the best possible product for your budget. The Megawatt Hour empowers energy purchasers with data and information.

What is The Megawatt Hour?

The Megawatt Hour is a decision-making platform for energy purchasing and sustainability strategy. Transactions are simple, decisions are hard. The Megawatt Hour puts customers in charge of their energy costs. We are the only online site dedicated to helping commercial and industrial customers track and forecast energy usage and expenditures. Our pricing is the most up to date and comprehensive in the industry, and is the only site that provides energy cost information directly to clients, instead of to suppliers, retailers and wholesalers.

What is Wholesale Power?

Wholesale power is generally traded between entities that will not ultimately deliver electricity to the end-user. These players may be generators of power, commodity trading shops, investment banks, independent power producers or large energy holding companies. Participants in the wholesale power market are regulated by the Federal Energy Regulatory Commission and usually by a regional authority (an Independent System Operator or a Regional Transmission Authority). The RTO or ISO administers the wholesale power markets and manages the flow of power over the transmission grid to insure reliable power at the lowest cost. There are three components of the cost of wholesale power, energy, capacity and ancillary services.

How does The Megawatt Hour arrive at today’s market projection?

Like any commodity, electricity is bought and sold in the forward market by banks and commodity houses.  The Megawatt Hour receives daily information and updates from a number of wholesale energy market information services and uses our own algorithm and supply expertise to provide you with a view of the forward market.  The forward price that you see on the dashboard is very close to the price that any wholesale provider would see—or that any retail provider would use to calculate your retail price (see Pricing detail for more information).

How do energy markets function?

There are a number of components to a retail electricity price (see Components of your electricity price) – energy, capacity, ancillaries, transmission, delivery and retail margin.  Energy and capacity are traded in the wholesale market.  There are various ways of arriving at a price, but generally there are rules that govern how buyers and sellers can participate in the market, and these components are bought and sold in day-ahead (literally buying today for delivery tomorrow), real-time (buying right now for delivery in the next hour) and forward (buying now for the next 1 to 36 months ). Ancillaries, transmission and delivery tend to be controlled by regulators and the ISO, resulting in fairly uniform rates that all market participants must pay.

What is deregulation?

By deregulating the electricity industry, policymakers and regulators created competitive markets for the supply of electricity to customers.  The graphic shows the billing components for which electricity suppliers can compete in deregulated markets (the top four components of the bar).  Prior to deregulation, vertically-integrated utilities provided all components to rate payers, including electricity supply, transmission, and distribution.  In a competitive environment, utilities have “unbundled” the non-delivery portion of their service, primarily the energy, and those services are now open to the competitive marketplace. The retail electricity industry has existed since electricity deregulation began in 1995.  Primarily because there is no overriding federal legislation dictating retail competition, state policymakers have undertaken deregulation of the electricity industry differently in each state.  There are different market structures, operating rules and requirements in most states.  This approach has added complexity to your energy purchasing decision; particularly for those of you whose operations span many different markets.

Components of Costs – Energy

The power that runs the motors, lights the lights, and turns the meters is the largest component of your electricity cost. The wholesale cost of energy in deregulated markets is the known as the Locational Marginal Price (LMP), which is a market-based value that includes power generation costs and the costs of transportation and losses to a specific location. That location is your load zone. The LMP is defined each hour by an auction process administered by the ISO. The LMP prices are publicly available.

Components of Costs – Capacity

Since electric energy cannot be easily stored, the ISO administers a market for installed generation capacity to insure that, over the long run, adequate generation resources are available to supply load. Each electric account is assigned a capacity obligation and each retail electricity supplier must purchase installed capacity to meet that obligation. The market price is set by annual and/or monthly auction processes that differ among the ISOs. This cost will be the second largest component of your electricity cost. (There is no installed capacity obligation or cost in ERCOT.)

Components of Costs – Ancillaries

Ancillaries (or ancillary services) are required to support secure and efficient operation of the wholesale power system. Short-term (10 to 30 minute) reserve power and regulation (real-time frequency) support are procured by the ISO through market auction processes. Ancillary charges also include smaller charges for other operational costs, fees to pay for the ISO and uplift charges whenever exigencies require operation outside of normal, efficient dispatch. The ISO procures these services directly from generators and independent power producers and then passes the costs through to all retail suppliers of electricity, and, ultimately, to purchasers of electricity. These costs can be quite volatile but are usually less than the cost of installed capacity.

Components of Costs – Risk Premiums

Wherever a retail contract specifies a fixed charge for the term of the contract, the supplier will seek to hedge the price risk by making purchases in the wholesale forward market. Some components of cost cannot be readily procured in any forward market. For example, ancillary services cannot, usually, be ‘hedged’ by a forward purchase. Wherever the retail contract price is fixed, but the retail supplier cannot purchase the component in a forward market, there is a price risk to the retail supplier. Suppliers will include these risk premiums in your price. These premiums will be built in to the fixed component of your price–in to your fixed price if that is the product you choose, or in to the fixed adder component of your index with adder.

Components of Costs – Losses

The electric distribution system requires retail suppliers to purchase a bit more power in the wholesale market than the power measured at your meter. These losses are fairly small (2% to 10%) but can be quite volatile since they are dependent on hour-to-hour load and temperature. The retail supplier must estimate and incorporate the distribution loss factor in to their cost calculations.

Components of Costs – Margins

The retail supplier must forecast retail loads, schedule wholesale purchases with the ISO every hour, purchase forward supply where appropriate, financially settle with the ISO, and, importantly, post credit for all transactions. The retail supplier, usually, must produce bills for, and collect from, retail customers; collections may be delayed or at risk. The cost for people, systems, and credit to do all these things, in addition to the additional margin needed to run a profitable business, is included in the retail margin. Retail margins are typically from $0.002 to $0.004 per kWh, depending on the size and complexity of your products and requirements.