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Big Electricity Cost Gifts Coming in 2020

With the holidays right around the corner, a big gift is coming your way in the form of lower 2020 electricity costs. For the first time in many years, your electricity budget could see an overall decrease of up to $14.00/MWh. Finally, a reduction in expenses! Now, what to do with all the money?

Why the decrease?

Wholesale Market Decrease

The wholesale electricity market in Ohio has dropped 13% from this time last year. A 36-month, around-the-clock price at the AEP/Dayton hub was $32.32/MWh last December and is now trading at $27.88/MWh. Much of the decrease is due to continued strong natural gas production and gas storage inventories returning to healthy levels. The wholesale electricity market is the basis competitive retail electric suppliers (CRES) use when determining retail pricing.

       Bottom line: Wholesale market decrease of ~ $4/MWh.

Lower Capacity Auction Rate

Approximately 25% of CRES retail pricing is driven by PJM capacity costs. PJM capacity costs are unique to each account and are based on how the account consumes electricity. Two inputs make up charges for each account: the annual PJM auction rate and the Peak Load Contribution PLC). The PJM auction rate is determined annually, three years in advance of the delivery period starting in June. The good news is that starting June 2019, the PJM auction rate in Ohio decreased 40% with an additional decrease of 12% starting in June 2020. Looking at these costs over a calendar year instead of the June – May cycle yields a 31% calendar-year decrease, from $124/MW-d in 2019 to $85/MW-d in 2020. Converting these costs to MWhs typical for manufacturers equates to $8.60/MWh in 2019 down to $5.90/MWh for 2020.

       Bottom line: Capacity auction rate decrease of ~ $2.70/MWh.

PLC Reduction

As mentioned, Peak Load Contribution (PLC) is the second input that determines PJM capacity costs. This value represents the average of an account’s consumption during the five highest-consuming hours for the PJM system the previous summer. In 2018, PJM’s average consumption during the five highest-peak hours was 148,008 MW and in 2019 the average was 143,345 MW for a decrease of 3%. Additionally, Ohio’s Cooling Degree Days (a measure of how hot the temperature is on a given day) during each day of the five highest-peak hours was 17% lower during the summer of 2019 compared to the summer of 2018. The benefit of lower temperatures on an account’s PLC is unique to its operations and weather sensitivity but capturing just a 5% PLC reduction would decrease costs from $5.90/MWh to $5.60/MWh. The 2019 PLCs should be released in the coming weeks by each utility.

       Bottom Line: Every 5% decrease in PLC equates to a decrease of $0.30/MWh.

Elimination of Distribution Riders

Two significant delivery costs have been eliminated in Ohio that impact AEP Ohio and FirstEnergy (Ohio Edison, Cleveland Electric Illuminating and Toledo Edison) customers. The first is the Retail Stability Rider charged by AEP Ohio. This rider was collecting deferred capacity costs; it was awarded to AEP Ohio by the PUCO during a rate case argued in 2012. The amount awarded by the PUCO was fully collected by AEP through this rider as of August 2019. The cost of this rider for a typical manufacturer was around $7/MWh. Comparing eight months of these costs in 2019 vs. no costs for 2020 achieves an average annual reduction of $4.60/MWh.

For FirstEnergy customers the elimination of the Distribution Modernization Rider was a big win handed down from the Supreme Court of Ohio. This charge was first introduced by FirstEnergy to enhance the credit rating of the corporation. After years of collecting this rider, the court deemed it improper. These charges which averaged $3/MWh for most manufacturers were eliminated starting June 2019. Comparing six months of these costs in 2019 vs .no costs for 2020 gains a total average annual reduction of $1.50/MWh.

       Bottom Line: AEP Ohio delivery decrease of $4.50/MWh. FirstEnergy delivery decrease of 1.50/MWh.

House Bill 6 Impacts

The highly controversial House Bill 6 is now the law of the land in Ohio. Along with the negative long-term impacts of market distortion through subsidization there are short term costs and credits associated with this bill. The details of these costs and credits are still being finalized through the regulatory process but best we can tell certain customers could see a temporary short-term cost benefit for 2020. Keep in mind, a new charge will be added to your utility delivery invoice to subsidize the nuclear and coal plants included in the bill; however, it is expected that these charges will not hit until 2021.

The bill in the short term freezes Renewable Portfolio Standards (RPS) and eliminates the standards for large customers consuming more than 45,000 MWh annually and self-assessing the kilowatt-hour tax. This exemption is available starting January 2020 and is achieved via negotiation through your retail supplier.

       Bottom Line: Decrease for qualifying accounts of $0.40/MWh.

HB 6 essentially removes the utility energy efficiency and renewable programs starting January 2021. In the meantime, mercantile customers (those consuming more than 750,000 kwh/year) can opt-out of paying the energy efficiency riders for 2020 in return for forfeiting any future energy efficiency rebates. Depending upon the location of the facility, a typical manufacturer is paying $2.30/MWh in AEP Ohio, $2.60/MWh in FirstEnergy, $5.00/MWh in Duke Energy and $4.00/MWh in DP&L.

       Bottom Line: Decrease for qualifying accounts of $2.30/MWh to $5.00/MWh depending upon the utility.

In total, there is much to be thankful for with the potential of a $14.00/MWh reduction in electricity prices in Ohio. Depending upon your current deal structure with your CRES you may already be receiving some of these benefits. For others, this reduction will be a welcome relief. Happy new year!

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