Energy risk management strategies vary in complexity and success, but those which deliver the highest value tend to look at the entire energy management picture. A holistic energy risk management strategy comprises:
- Product Selection—Understanding the risk embedded in the cost of every kilowatt hour (kwh) delivered;
- Energy Efficiency—Analyzing usage patterns to identify opportunities for improving energy efficiency; and
- Transmission and Distribution System Costs—Evaluating usage patterns and demand to minimize the risk of demand spikes and lower overall cost.
Most energy risk management plans cover at least the first item and some even include the first 2 elements, but very few include all three. Unlike parts 1 and 2 of an energy risk management plan, part 3 (transmission and distribution costs) are regulated by state commissions. However, there are actions which end users can take to manage the impact of these charges on the bottom line of a business.
Why Transmission and Distribution System Costs Matter
The following graphic breaks down a sample energy bill by cost components.
It is important to note that the percentages will vary according to local factors and actual energy rates. However, the sample bill shows that a significant portion of total energy costs are contained in the transmission and distribution costs and the percentage of the total costs attributable to transmission and distribution increase as power costs decrease.
Understanding Transmission and Distribution Charges
Think of the transmission and distribution system as the electric grid’s road system. Transmission occurs at high voltage over 345 or higher kilovolt rated wires (these are the wires on large metal towers that cover long distances) and serves as the highway system, while the distribution system is at lower voltage levels and delivers power directly to end use consumers (think of these as surface streets). Transmission and Distribution (T&D) charges, which are regulated, are charged based on 2 factors—peak demand and usage.
Demand based T&D charges are based on the maximum power demanded by an end user at any particular instant in time. Charges are assessed in this manner because the utility has to build the transmission system such that it can deliver the maximum power demanded at any one time. Per usage charges are typically for the use of the distribution system and are based on actual consumption plus what is known as a line loss factor. The line loss factor is set by the utility and is based on the amount of power that is “lost” through resistance as electrical current is forced along the T&D system from the source (generation) to the sink (end use customer).
Options for Controlling T&D Charges
Unlike contracts for retail power which offer a wide array of energy risk management strategies to control costs, options available to control T&D costs are more limited. One strategy is to reduce demand, which involves making sure that electrical equipment is functioning as efficiently as possible. Not only will this reduce demand, put it should also decrease consumption, lowering not only T&D costs, but also energy costs since less energy is consumed. A second way to manage T&D costs is through the “ramping” of power usage. Instead of turning on all equipment at once, bringing it on-line gradually avoids spikes in demand, which otherwise can lead to costly demand ratchets imposed by the T&D operator as demand spikes create unnecessary strain on the system.
To implement either one of these strategies, however, requires an understanding of not just aggregate consumption, but demand and usage patterns. A comprehensive energy risk management plan will assess the risks and benefits available through product selection, energy efficiency, and controlling T&D costs.
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