Term: Capacity

Electricity Capacity

Capacity can take on different meanings in the electricity market depending on the aspect of the market being discussed. As it relates to electricity generators, capacity is the total amount of electricity that can be generated at any given time at the plant. When talking about retail electric bills, capacity is a charge, collected by grid operators, and paid to electricity generators in an effort to support reliability. More to come on the subject of capacity below…

How Does Capacity Affect My Electricity Bill?

Since battery technology is not efficient at this point, electricity cannot be stored. Grid operators are tasked with the challenge of continually balancing electricity supply and demand in an effort to avoid blackouts and brownouts. Too much demand or supply has a negative effect on the grid and cause power lines to fail. Since total electricity demand from homes and businesses is unpredictable, grid operators implement systems to ensure reliability. One of those measures is billing rate payers for capacity.

Yes, that’s right. Somewhere buried in your total price for electricity is a charge called capacity. And all rate payers, with the exception of those in Texas, pay capacity charges to their local electric utilities or suppliers. Capacity is an expense placed on utilities and electricity suppliers that is ultimately billed to the end user. 

But, Where Does the Money Go?

Grid operators use the proceeds from capacity charges to compensate electric generation plants in an effort to maintain safety and reliability on the grid. Electricity generators are paid for their future commitment to generate enough electricity to meet future demand. Typically, these capacity payment incentives produce enough of a commitment from generators that the grid is never in dire straits.

How Much Do I Pay in Capacity?

Since capacity relates to the grid’s effort to ensure that there is enough electricity generation to meet demand at all times, customers are billed according to their individual demand contributions. Electricity demand is measured in kW (see Electric Demand vs. Usage here), and is a calculation of your total peak energy consumption at a given time. Since most electricity demand peaks in the hot summer months when electricity consumption is at its highest, customer demand is typically measured in the summer and capacity is billed based off that demand.

But, What Does It Mean in Dollars?

Each grid operator manages the cost of capacity differently. What they do have in common, however, are the way capacity rates are set. Most grid operators hold capacity auctions where electricity generators bid on the cost to guarantee electricity production into the future. These auctions set the base price of capacity several years into the future, and are commonly referred to as base auctions. As time goes on and actual electricity demand becomes more apparent, residual capacity auctions occur to bid on the cost to produce the extra electricity that is projected by the grid for the current period.

Sound confusing? Don’t fret. Capacity rates are published on your local grid operators website (such as PJM.com – the grid operator in the Mid Atlantic). Calculating your capacity costs is a simple equation for most customers. Simply take your peak demand kW reading and multiply it by the daily capacity rate. For example:

  • Capacity Rate = $0.19/kW per day
  • Your peak kW Measurement = 100 kW
  • Your total capacity costs for the year = $6,935 (100 x $0.19)

Don’t worry, you do not have to pay that all at once. Your total capacity costs are built into your price for electricity from your local utility or electricity supplier and are spread out over all of the Kilowatt-hours that you use for the year.

How Can I Lower My Capacity Costs?

If you’re located in a regulated state, there is not much you can do to lower your electric capacity costs. Typically, regulated utilities set a price for electricity that is standard for all customers in a certain class (e.g. residential, commercial, industrial). Even if you could lower your total peak kW (the unit tied to your total capacity costs), the utility company is still going to bill you the same amount.

If you live in a deregulated state, however, you have the option to purchase your electricity supply from a company other than your local utility. There are a few ways in which you can lower capacity costs with an electricity supplier:

Lower Peak Demand: First, determine how your local grid operator is calculating your peak demand for capacity. Implementing energy efficiency solutions such as LED lighting is a great way to lower your peak electric demand. You might also considering entering into a demand response program (see Demand Response here).

Fixed Rate Contracts: If you are on a fixed-rate electricity contract with your supplier, lowering your peak demand will not help you save on capacity costs until your next contract. When suppliers quote a fixed price to you, they are calculating your anticipated capacity costs that are then quoted in your total rate. If you are on a longer term contract, and you lower your demand, the capacity savings only benefit the supplier.

Pass Through Contracts: There are other types of electricity supply contracts that allow you to pass through capacity charges at costs, and they are not bundled into your total rate. If you are planning on implementing a demand response program or efficiency solution to lower peak demand, you may consider a pass through contract. This will give you the ability to realize capacity savings in real-time.

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