Identifying Electricity Savings in Deregulated Markets
By Eric Thames, Managing Principal, Energy Paradigm, LLC [email protected]
Identifying ways to reduce costs at the site level during a pandemic can be challenging. The majority of a retailer’s store costs are fixed whether the store remains open or not. One area where a company can explore the potential to reduce expenses is utilities.
Depending on the lease terms with your landlord, utilities may or may not be included in the lease payment. In cases where the tenant is responsible for utilities, there are several strategies to decrease electricity, natural gas, water, sewage, and trash costs. Nonetheless, these four utility types offer a wide range of savings opportunities for company stakeholders to explore. For the purpose of this discussion, we will focus on reducing electricity costs in deregulated U.S. markets.
In 1992, the Energy Policy Act allowed states to deregulate their electricity markets. The initial goal of deregulation was to increase the use of renewable energy, energy efficiency, and investment in power plants and transmission/distribution lines. As of 2020, approximately twenty-five percent of states in the U.S. have some level of a deregulated market (see map in Figure 1-1).
Since most U.S. electricity markets are regulated, it is important to understand the differences between a regulated and deregulated market.
A “regulated electricity market” contains utilities that own and operate all electricity. From the generation to the meter, the utility has complete control. The utility company owns the infrastructure and transmission lines, then sells it directly to the customers. In regulated states, utilities must abide by electricity rates set by state public utility commissions. This type of market is often considered as a monopoly due to its limitations on consumer choice. (see Figure 1-2)
A “deregulated electricity market” allows for the entrance of competitors to buy and sell electricity by permitting market participants to invest in power plants and transmission lines. Generation owners then sell this wholesale electricity to retail suppliers. Retail electricity suppliers set prices for consumers, which are often referred to as the “supply” portion of the electricity bill. It often benefits consumers by allowing them to compare rates and services of different third-party supply companies (ESCOs) and provides different contract structures. (see Figure 1-3)
In Figure 1-2, one can see that only one generation plant, one transmission and distribution line, and one retail company exists, resulting in a monopoly. In Figure 1-3, the supplier can choose which power plant to purchase electricity from, and the customer can select which supplier to purchase electricity from creating a competitive market. One of the few similarities of a regulated and deregulated market is there remains only one transmission and distribution company. Since there is only one, these costs stay independent of the supplier that is chosen.
So how do you reduce costs in a deregulated market? As mentioned, since the transmission and distribution costs stay the same with each supplier, the opportunity to cut costs lies in the energy or supply cost portion of your electric bill. Let us look at a sample bill comparing the supply costs of a utility vs. a third-party supplier.
Broken down, your energy or supply rate with the utility compared to the third-party supplier is as follows:
Utility Supply Cost $.142 per kWh x 21,120 kWhs Used = $2,999.04
Third Party Supply Cost $.04599 per kWh x 21,120 kWh Used = $971.31
Monthly Savings = $2,027.73
Annual Savings = 12 x 2027.73 = $24,322.27
Clearly, the Texas example shows significant cost disparities between the utility and a third-party supplier. The key takeaway here is that if you have locations in deregulated markets where you are responsible for the electricity bill, it makes sense to evaluate or retain an advisor to help you identify lower electricity rates.
Putting everything into perspective, let us take a look at a case study of a retailer who initiated an enterprise program to identify lower electricity rates for all of their deregulated U.S. locations. This mid-box retailer has approximately 1,00O retail stores with a planned ten percent annual organic brick-and-mortar store growth. When we began working with this client in 2012, they had seventy-five (75) deregulated stores located in Maryland, New York, Connecticut, New Jersey, Texas, Illinois, and Ohio. These sites were located across twenty-five (25) different utilities with no centralized energy purchasing strategy. Many of these locations were either paying the local utility rate or had contracted with a third-party supplier at an unfavorable supply rate. The client hired us to help them analyze the cost structures for each of the seventy-five locations. After analyzing the utility rate structure and third-party supply agreements for each location, their annual deregulated energy spend for the seventy-five locations was $1,444,000. After securing more favorable terms, their annual spend was reduced to $852,569 resulting in an annual savings of $291,252.
In summary, a strong business case can be made for a retailer to evaluate its portfolio of deregulated locations for lower electricity rates. Whether this is performed internally or by partnering with an energy advisor is certainly something worth exploring.