Electricity Pricing Breakdown: Ancillary Services Cost Components (Article 4 of 5)
January 21, 2014
Electricity Pricing Breakdown is a new series in Market Monitor designed to give buyers a better understanding of the many cost components that drive the total price large commercial and industrial customers ultimately pay for electricity.
The last article in the series focused on capacity costs. In market structures where capacity is a factor, this pricing variable helps ensure enough power to maintain grid reliability during periods of peak demand.
This week’s edition focuses on the components involved in ancillary services, which are required to ensure reliable operation of the power system. These variables are located in the upper portion of the energy pyramid and can make up anywhere from 3 percent to 7 percent of the total electric bill.
Ancillary services cost components vary from market to market and can be presented differently by each supplier. This article outlines the variables that GDF SUEZ Energy Resources includes in its pricing proposals in the four competitive markets the company serves.
Each cost component is covered in detail, outlining its purpose and the type of risk it carries. Risk can be categorized as market-based, meaning the value is determined by market forces; non-market-based, meaning the value is determined by tariff or settlement protocol; or a hybrid of market-based and non-market-based factors. The article also covers how the risk can be mitigated – hedged or through risk premiums/credits or in contract language – and how pricing is determined.
When reviewing product offers, keep in mind that other suppliers may categorize certain charges differently or omit them entirely from a proposal.
In PJM, for instance, transmission enhancement charges are sometimes included with transmission costs and renewable portfolio standards are sometimes excluded completely. Credits are another example. GDF SUEZ Energy Resources returns many credits to customers in the fixed price/index adder or as a pass-through item. However, some suppliers retain these credits and omit them from pricing proposals altogether.
To conduct an accurate comparison, be sure to account for all of the costs involved in ancillary services in your market and understand how the supplier has treated them in the pricing offer. For an in-depth look at the ancillary services cost components included by GDF SUEZ Energy Resources by region, click on one of the four competitive markets below:
Ancillary Services Cost Components - NYISO
NYISO-Wide Uplift Charge covers the cost of dispatching economic units to provide NYISO statewide reliability. This variable carries a non-market-based risk.
Local Reliability Uplift Charge covers the cost of dispatching uneconomic units to provide locational reliability. This variable carries a non-market-based risk and pricing varies largely based on sub zone.
Reserve Charges are designed to deliver adequate operating reserve by providing spot-market support, ensuring pool-scheduled generation, and making certain demand resources are guaranteed to fully recover their daily offer amounts. This variable carries a non-market-based risk.
Regulation & Frequency Response Service pays generators for balancing support of the transmission grid and maintaining acceptable frequency limits at interconnection sites. This variable carries a market-based risk.
Black Start Service ensures reliable restoration of the grid following a shutdown of the NYISO transmission system. This variable carries a non-market-based risk.
Scheduling, System Control & Dispatch Service is a fee paid to the grid operator for running the transmission system, including dispatch, control, and scheduling. Credits are paid to transmission owners. This variable carries a non-market-based risk.
Voltage Support Service pays generators for delivering voltage support to the transmission grid. This variable carries a non-market-based risk. Phase Angle Regulator Charges recover the costs for NYISO’s monthly payment, which is needed for the economic and reliable operation of the transmission system. This variable carries a non-market-based risk.
New York Power Authority (NYPA) Transmission Access Charge is an embedded cost to recover the NYPA transmission revenue requirement not recovered through the transmission service charge. This variable carries a non-market-based risk.
Residual Adjustment is a modification to the costs associated with the operation of the transmission system and administration of the tariff by the grid operator. This variable carries a non-market-based risk that can be mitigated through risk premiums. In some cases, customers can receive a credit.
Unaccounted for Energy is a settlement mechanism for line losses. This variable carries a hybrid of market-based and non-market-based risk that can be hedged or mitigated through risk premiums. In some cases, customers can receive a credit.