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BENEFITS OF
ELECTRIC LOAD AGGREGATION A Pace Global Energy Services White Paper Introduction Electric load aggregation is the process by which individual energy users band together in an alliance to secure more competitive prices than they might otherwise receive working independently. Aggregation can be accomplished through a simple pooling arrangement or through the formation of clusters (the method Pace employs on behalf of its clients) where individual contracts are negotiated between the suppliers and each member of the aggregate group. While natural gas purchasing alliances have been around for years, states have only recently begun to allow businesses to purchase electricity from third party suppliers and, just as importantly, to aggregate loads across multiple facilities. This paper, one in a series, focuses on the benefits of electric load aggregation for industrial energy consumers. Increased Buying Power Big
industrials with sizeable electric loads typically have greater
purchasing power and more leverage in negotiations with their energy
suppliers than smaller companies. It
stands to reason that the more you buy of a given commodity, the more
likely you are to secure a volume discount and therefore, lower per unit
costs. When buying electricity from retail suppliers, bulk discounts
are often contingent upon the purchaser’s ability to buy efficiently
traded blocks of power. Depending
on the prevailing market conditions, the purchaser may need to buy a 25
to 50 megawatt block of power in order to approximate wholesale pricing. Since very few industrial facilities consume electricity in
those quantities, companies have begun to aggregate the loads of several
of their own plants or form purchasing alliances with other local
businesses to purchase the larger blocks of power.
The aggregate load also
tends to attract more suppliers to the market.
In turn, this creates a competitive bidding and pricing situation
that benefits the pool members. Improved Load Factor Load factor is the ratio of
electricity consumption to peak demand (expressed as a percentage) for
each billing period. Through
load aggregation, companies can enhance their purchasing power by taking
advantage of load diversity among multiple facilities as a means of
improving the overall load factor for the group.
In order to understand this concept it is important to understand
how load factor affects the purchase price of electricity.
Utility regulation allows
energy suppliers to apply a demand charge to each customer’s electric
bill that reflects the proportionate investment in power generation
capacity needed to meet that customer’s maximum load requirements, or
peak demand. The demand
charge, unlike the energy charge, is a fixed cost that does not vary
according to the number of kilowatt hours consumed during the billing
period. To the extent that
a customer’s load factor is relatively high, meaning their load runs
consistently at or near their peak demand, the demand charge will
represent a smaller percentage of the overall cost of energy consumed. When the loads of several customers are aggregated, non-coincident peaks and valleys in the load profiles of individual customers tend to offset one other. This dampening effect results in a flatter overall load profile, a higher load factor, and ultimately, lower per unit energy costs for all members of an aggregate group.
Lower Transaction Costs/Scale
Economies Buying electricity on the open
market has become a risky and complicated process. With dozens of power suppliers offering a confusing patchwork
of contract terms, weighing the merits of competing bids can be a daunting
task, especially for companies with limited experience in competitive
power procurement. While most
companies expect to pay less for electricity in deregulated markets,
poorly negotiated contracts, defaulting suppliers, and failure to
understand the “fine print” have actually resulted in higher energy
costs in many cases. Load aggregation creates
economies of scale by making it possible for companies to share the cost
of supplier selection and energy contract management. The aggregate group may be able to realize additional savings
by engaging the services of an independent energy manager experienced in
packaging load data for market, managing the RFP process, and leading
negotiations with suppliers. By
deploying a higher level of expertise in the power procurement process,
the aggregate group will typically enjoy more competitive rates and lower
transaction costs than they could achieve working independently. Supply Portfolio Structuring In the
wholesale electricity market there are a variety of services or
“products” that can be purchased to meet one’s energy needs.
For example, suppliers offer base load, peaking load, super peak
load, and other products to meet consumer demand over a given time period.
Many consumers, however, opt to pay a fixed rate for
full-requirements to effectively cap their energy costs and minimize their
exposure to price volatility. This
approach has its advantage but the consumer ends up paying a hefty premium
for, in effect, asking the supplier to assume the risks associated with
meeting ill-defined load requirements.
Alternatively, if a facility has carefully analyzed its load requirements and can effectively manage load going forward, the facility may be able to realize significant savings by acquiring a portfolio of energy products that meets its anticipated needs more efficiently than a full-requirements contract. As mentioned previously, these energy products are typically traded in volumes that far exceed the demand of most individual consumers. By aggregating the loads of multiple facilities it becomes feasible to purchase the larger blocks of power and take advantage of price signals associated with using power at different times of the day.
Conclusion Electric load aggregation is one of the most effective means of maximizing savings and mitigating risks in today’s emerging power markets. The challenge lies in finding suitable aggregation partners and in finding an independent energy procurement specialist capable of analyzing load data, administering the RFP process, leading negotiations with suppliers, and providing ongoing management and monitoring services on behalf of the group. Pace Global Energy Services has been very successful at forming power (and gas) purchasing alliances by leveraging its extensive client base across the country. On behalf of its clients, Pace has developed creative ways of packaging load data for market, secured the most competitive rates available, enhanced supply security, and brought clarity and organization to a confusing procurement process. It is important to note, however, that pricing for members of an aggregate group may vary depending on individual load factors, cost of service, and supply objectives. Despite minor pricing variances, electric load aggregation represents a powerful cost-reduction tool for companies with varying load shapes and sizes. Pace Global Energy
Services is a recognized leader in offering energy management and
consulting services. To learn
more about Pace, look for us on the Worldwide Web: www.paceglobal.com;
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