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Cape Wind

It was recently reported that a power purchase agreement between National Grid and Cape Wind was approved by the Massachusetts Supreme Judicial Court. National Grid is committed to purchasing half of the output of the project at a starting price of 18.7 cents per kilowatt-hour. This price will then escalate 3.5% per year for 15 years.

With this 3.5% annual compounding, the contract price will reach 30.3 cents/kWh in the fifteenth year. Over the term of the agreement, the average price from Cape Wind will be 24.1 cents/kWh. How do these prices for wind generated electricity compare to historical electricity prices in New England?

The above graph shows the daily price of electricity in NEPOOL over the period of time spanning 2001 through 2011 (blue line). NEPOOL is New England’s bulk electric power market. In New England, as is the case elsewhere, electricity prices exhibit considerable volatility. Over this eleven year period, daily electricity prices have been as high as 31.2 cents/kWh and as low as 2.5 cents/kWh, and have averaged 6.3 cents per kWh (red line).

Electricity prices in New England have been declining. Since the beginning of 2009, daily electricity prices have averaged 5.2 cents/kWh.

So, how does the cost of electricity from the Cape Wind project compare to historical prices in New England? In order to provide a visual sense, the two graphs above are reproduced below, each modified to have the same vertical axis scale. In both cases, the horizontal red line represents the historical average wholesale price of 6.3 cents/kWh.

Cape Wind’s website describes their project as consisting of 130 wind turbines that can produce up to 430 megawatts of electricity. Assuming a 25% capacity factor and the application of both the historical average NEPOOL price and the average Cape Wind contract price to the total projected output of the wind farm, the annual difference in cost is estimated to be $167 million.

The Cape Wind project represents a large, long position in what today is expensive electricity with a fixed escalator. This analysis is limited and does not reflect future price movements (up or down) in the cost of electricity associated with the existing and future fleet of generation in New England nor the environmental, social and operational costs and benefits associated with the existing and future fleet of generation and the Cape Wind project.

The Avalon Advantage – Visit our website at, call us at 888-484-8096, or email us at

Copyright 2012 by Avalon Energy® Services LLC

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Best Friends? – Natural Gas and Electricity Prices

We have looked at historical and forward natural gas prices. How have electricity prices been behaving?

The graph above shows the monthly average of electricity prices at PJM West (a trading hub where electric generation is concentrated) spanning the 131 month period of time of January 2001 through November 2011. Like natural gas, electricity prices peaked during 2008, declined, recovered somewhat, and then declined again. The relationship between electricity prices and natural gas prices can be seen better in the graph below:

Please note that in this graph electricity prices have been converted to cents per kilowatt-hour. When plotted together, electricity prices and natural gas prices seem to track closely, and the reality is that they are closely related. In the Mid-Atlantic, electricity prices and natural gas prices are strongly correlated. Natural gas fired generating units are usually the marginal units called upon by the grid operator and, as such, set pricing in the wholesale markets. So, generally in the Mid-Atlantic, as natural gas prices go, so go electricity prices.

While electricity price and natural gas prices tend to move together, the relationship between the two does change over time.

The graph above shows the correlation on a rolling 24 month basis. Over this period, the correlation between electricity and natural gas averaged 71% but has been as high as 97% and as low as 21%. The weakest correlation was during 2008, when natural gas prices moved upward more vigorously than did electricity prices. After having moving up to 97%, the correlation has been declining over the last two years.

In the above graphs, you can see how over the last two years, electricity prices have recovered more strongly than natural gas prices, leading to declining correlations between the two.

The Avalon Advantage – Visit our website at, call us at 888-484-8096, or email us at

Copyright 2012 by Avalon Energy® Services LLC

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Trade Association Buying Groups – Who Benefits?

Do businesses benefit by purchasing energy through trade association buying groups?  In many cases “no.”  How can that be?

First, some background.  The term “load profile” refers to the variation of an electricity user’s electrical load versus time.  Load profiles vary by customer categories (residential, commercial and industrial) and by individual customer within those categories.  Customer’s individual load profiles are used to estimate their electric supply requirements and determine their individual pricing.  The two main drivers of pricing are demand charges and energy charges.  Demand charges are based on a customer’s peak load as measured in kilowatts (kW).  This is the customer’s highest rate of electricity usage during a given time period.  Energy charges are a function of how much actual electricity a customer uses over a given time period (month, year), measured in kilowatt-hours (kWh).

When customers with individual load profiles are aggregated, an economic benefit to the overall group may result.  Whether or not an economic benefit results depends largely on whether or not the aggregated group of customers have non-coincident peaks.  When combined, customers who have variation in their individual peaks may have a more attractive overall load profile and this can lead to improved pricing for the group.  Where does the benefit go?

The value of any economic benefit resulting from forming an aggregation group can be shared with the customers, kept by the supplier, or a combination of the two.  Customers will rarely ever know if there is a benefit and what comes of it.  The only way customers could possibly tell is to have the supplier price each load individually, price the group as a whole and then compare the two sets of prices.

There are also costs associated with participating in trade association buying groups, many of which are hidden.  Such costs include:

Open Offers

When making offers, many trade associations and their supplier will keep the offer price open for a period of time.  This may be a few days, a week or even longer.  Holding a price open is risky for suppliers.  If, during the offer period, customers sign up and, at the same time, the wholesale market for electricity rises, the supplier can lose margin or even end up “upside down” having to purchase supply at a price that is higher than the price they have held open and committed to sell at to customers.  In order to protect themselves from this possibility, suppliers will add a risk premium to their offer price.  This can be expensive and drives up the offer price.  [Alternatively, suppliers may “pre-purchase” supply in anticipation of making an offer.  In this case, the risk works in reverse.  If during the offer period the wholesale markets decline, customers who sign up will pay an above market price for their electricity.]

Expensive Embedded Option

Some trade associations promote that their contracts call for no penalties to be paid by the customer if the customer breaks their contract because they sell their property before the end of the contract term.  This is an option and options have value.  In exchange for including this feature in a contract, suppliers add a premium to protect themselves in case customers exercise this option and break their contracts because of the sale of a property.  The customer pays this option premium whether they exercise the option or not.  And what is the customer paying for?  This option is only of value to the customer when two conditions are simultaneously true; (1) they sell their property during the contract term, and (2) prices in the wholesale market are lower at the time the contract is broken compared to when the contract was entered into.  Most customers do not expect to sell their properties during the term of their electricity supply contracts.  And, what is the likelihood that prices will fall further below today’s already low levels?  In summary, customers end up paying for an option feature that has little chance of being of value to them.

Trade Association Fees

In order to entice a trade organization to promote the supplier’s offer to the trade association’s members, suppliers often will agree to make payments to the association itself.  These payments are rolled into the price they offer the trade association members and they can be substantial.  You may really like your trade association and may be happy they can make a buck or two, but you should be aware that they are being paid and that you are footing the bill.

No Competition

Suppliers seek trade association relationships because it is a way to exclude competition.  By gaining the trade association’s endorsement, the supplier no longer has to compete with other suppliers.  While the trade associations may conduct some sort of due diligence during a selection process, what matters is the pricing the suppler offers the trade association’s members during the offer period.  And, by this point, there is no competition.

Winner and Losers

When forming an aggregation group, there are times when some members of the group will benefit and others will not.  As an extreme example, imagine an aggregation group consisting of a large hospital and several small sandwich stores.  The hospital, with its attractive load profile, may end up with a slightly higher price.  The sandwich stores, with their much less attractive load profiles, would each most certainly benefit immensely.  Sometimes some members of an aggregation group are subsidizing other members of the group.

So, what can be done?

If you are considering participating in an aggregation group, it is to your benefit to seek other quotes.  You cannot lose.  Either you will confirm that the aggregation group is economically better for you or you will elsewhere find better pricing, terms and conditions.

The Avalon Advantage – Visit our website at, call us at 888-484-8096 or email us at

Copyright 2011 by Avalon Energy Services, LLC.

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Fixed Price versus Variable Price Energy Supply Contracts

When purchasing energy, there is a price/risk continuum between fixed price contracts and variable price contracts.

Fixed price contracts allow you to minimize your exposure to price risk by transferring this risk to a supplier.

With a variable price contract, you are accepting the risk associated with changes in the market price of electricity. This is not an insignificant risk as electricity prices are highly volatile. And, electricity price risk is asymmetric, meaning there is much greater potential for upward movement than there is for downward movement (prices are bound by zero on the downside but are not bound on the upside). With variable price contracts, suppliers transfer electricity price risk to you. In exchange, pricing to you should be at a discount.

Most variable price contracts will base changes in the contract price to changes in an index. Here in the Mid-Atlantic, the grid operator, PJM, tracks hourly prices by zone. These hourly prices are referred to as “LMP” which stands for “locational marginal price.” These LMP prices are a transparent index, meaning PJM makes them available.

Most suppliers who sell variable price contracts will price them as “LMP plus a fixed adder” and they will tell you their “adder”. LMP is passed through to you dollar-for-dollar and the “adder” is their margin on top of LMP. With the same LMP as a basis, you can then compare what “adders” different suppliers are offering. This approach is transparent.

Some suppliers who sell variable price contracts base their prices on indices that are proprietary and vague. There is no place you can go to see the index. Further, they often don’t disclose what their margin is on top of the index and they don’t commit to keeping the margin fixed. This allows them great flexibility in what they charge you each month. You are left vulnerable and there are no checks and balances.

If your are currently purchasing from a suppler under a variable price contract that does not have a transparent index and does not have a fixed “adder” we recommend that you review your contract and examine all of the suppliers monthly invoices to see if you have been getting the benefit of an “index” product.

Avalon Advantage – Visit our website at, call us at 888-484-8096 or email us at

Copyright 2010 by Avalon Energy Services, LLC.

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Constellation Electric Offer (continued)

Both of our last two blog entries have generated a great deal of interest.  Jay Hancock of the Baltimore Sun picked up on our write-up on Constellation Electric’s offer to customers in Pepco’s territory.  Below is a link to his article:

You can scroll down to our original article or access it by going to:

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PECO – Life After the Rate Caps

Electricity markets were deregulated in Pennsylvania over ten years ago. At that time, the Pennsylvania Public Utility Commission implemented two measures. They allowed electric utilities to recover their “stranded costs” or the cost of investments they had made that they, the utilities, argued would no longer be of value in a deregulated environment. These costs were recovered through a billing surcharge termed the Competitive Transition Charge, or CTC. The Pa PUC also required the electric utilities to freeze or “cap” their rates.

So, what will happen at the end of this year, 2010? The good news is that the CTC surcharge will expire and no longer be charged to customers. The bad news is that the rate caps will also expire.

Currently, the CTC surcharge represents about 30% of the total bill for small commercial customers and about 26% for large commercial customers. The elimination of the CTC charges will, by itself, lower customer’s bills significantly.

At the same time, PECO’s generation and transmission charges currently represent about 50% of the total bill for small commercial customers and about 58% for large commercial customers. These charges are set to increase dramatically. Over the more than ten years that PECO’s rate caps were in place, the wholesale cost of electricity increased. As a result, PECO’s current combined generation and transmission rates are significantly “below market.” PECO generation and transmission rates beginning in January, 2011, will reflect the results of their procurement efforts in the recent and current wholesale energy markets.

During the spring and summer of 2010, large commercial customers had the opportunity to sign up for and participate in a default service auction PECO administered. For those large commercial customers who chose not to participate, their options as of 1/1/2011 will be to receive default service from PECO at the highly volatile Day Ahead Hourly Rate or to purchase energy from an independent electric generation supplier (EGS).

PECO is in the process of acquiring electricity in the wholesale markets for its medium and small commercial customer default service. While most of this supply was contracted for during the fall of 2009 and the spring of 2010, one more auction will take place this coming September. If we were to take a snap shot today, there are two primary reasons why PECO’s combined generation and transmission default rates will, for most customers, be higher than the cost customers could acquire electricity for from an independent electric generation supplier. First, when PECO conducts an auction, suppliers must bid on an uncertain volume and an uncertain average load profile. At the time of the auctions, it is unknown how many of PECO’s customers will remain on default service after January, 2011, and what their combined load profiles will look like. In order to protect themselves, suppliers must add a risk premium to their bids as a way to protect themselves from this uncertainty.

Secondly, the wholesale markets have been generally falling since the summer of 2008. PECO’s first and second auctions for its medium and small commercial customers were conducted while wholesale markets prices were higher than where they currently stand.

The following graphs show Avalon Energy Services’ current estimates of where PECO’s default rates may land along with current estimates of what customers could obtain electricity for from independent electric generation suppliers. Please keep in mind that the actual price of electricity purchased from independent electric generation suppliers can vary significantly based on a business’ individual load profile and credit standing as well as many influences in the wholesale markets. Having pointed this out, leaving PECO for an independent electric generation supplier may not necessarily be the best choice for all customers. It really depends on your unique situation.

Avalon Energy Services stands ready to help you. Let our experts assess your specific situation and develop an energy procurement strategy that best suits your needs.

Copyright 2010 by Avalon Energy Services, LLC.

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Constellation Electric Offer

A number of people in Pepco’s service territory have asked about Constellation Electric’s (Constellation) fixed price electricity offer.

In the commercial world, most customers view the likelihood that energy prices will go up as much greater than the likelihood that energy prices will fall further.  I think this makes sense.  Energy prices are currently low, unfortunately, because of the weak economy.  As the economy recovers, demand for electricity and natural gas will likely rise.  Commercial customers are currently locking in electricity and natural gas prices for two, three and even five years.

Constellation is offering to supply electricity to residential customers for one year at 9.65 cents per kilowatt-hour (kWh) and for two years at 9.55 cents per kWh. On their promotional offer, they note that their prices are 13% (for one year) and 14% (for two years) lower than Pepco’s current rate. Is this a good deal? Here are a few things to consider.

For most residential customers (Schedule “R”), Pepco’s current generation rate is 11.842 cents per kWh and its transmission rate is 0.348 cents per kWh, bringing the total G&T rate (excluding taxes) to 12.19 cents per kWh.  These generation and transmission rates are in effect from 6/1/10 to 9/30/10.

On its website, Pepco has posted its generation rate for the upcoming period of 10/1/10 to 5/31/11.  This rate is 9.885 cents.  Assuming the transmission rate during this eight month period remains the same as the current transmission rate, the total G&T rate (excluding taxes) will be 10.23 cents per kWh.  Based on this alone, Constellation’s offer of 9.65 cents per kWh seems attractive.  However, Constellation’s rate is only 5.7% lower than the forward Pepco rate that runs through 5/31/11. Beyond 5/31/11, any discount or premium to Pepco’s rate cannot be determined as Pepco’s rates have not been defined and won’t be defined until sometime in the future.

Read the “Renewal” paragraph in Constellation’s Terms and Conditions section.  It says, “This Contract shall be automatically renewed with the revised terms and conditions (including any updated pricing) unless you cancel the renewal by notifying Constellation Electric in writing within 15 days after receiving notice of the new prices and/or terms and conditions.”  This is a very short window.

In the “Term” paragraph, it says that the contract will automatically renew for an additional 12-month renewal term unless terminated. So, if you miss the window, or you don’t terminate the contract and pay a $150 penalty, you will be with Constellation for another 12 months at a rate they will define in the future.

If you are interested in locking in a fixed rate, there are other suppliers making offers. In addition to comparing their prices, be sure you read and understand their terms and conditions. You can find alternative suppliers on the Public Service Commission’s website.