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.
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
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
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
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
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.