Electricity Markets in Ohio
Ohio first restructured its electricity markets in 2001. However, only in the last several years has Ohio finally realized the benefits of a competitive electricity market. Electricity prices from Competitive Retail Electricity Service providers have dropped significantly since 2008, in principal part due to the recession, but also in part due to efforts by the Ohio Assembly and the Public Utility Commission of Ohio to make it easier for retail competition to thrive in Ohio.
Restructuring has made it possible for competition for generation. However it has not made understanding electricity markets easy for consumers. Understanding the components that make up the final cost of electricity is fundamental to the consumer’s ability to take advantage of competitive retail markets, and for managing electricity costs. However for those who prefer not to spend resources trying to understand electricity markets, there is available a default option for the purchase of electricity – the Standard Service Offer – pursuant to which the traditional incumbent utilities deliver power under the supervision of the Public Utility Commission of Ohio, as has been done traditionally. The Public Utility Commission of Ohio has recently required that the incumbent utilities use market-based wholesale electricity auctions to establish in part the Standard Service Offer price. Transmission, capacity, distribution and non-by-passable rider costs are added to the auction-based prices, plus a Public Utility Commission approved rate of return.
For those who do want to shop for their electricity supplier, there are a variety of competitive retail electricity service providers who provide a variety of products, ranging from fixed price contracts to variable rate contracts, and contracts that mix the two, called “block and index” pricing. The competitive retail service providers must beat the default price if they expect to win supply contracts. In addition, the competitive retail service providers pass through costs to the consumers from the Regional Transmission Organization that serves Ohio, PJM Interconnect. Regional Transmission Organizations are Federal Energy Regulatory Commission sanctioned organizations created to manage interstate transmission and wholesale electricity markets.
Pass through PJM costs includes capacity and ancillary charges. Historically, each has comprised less than 10% of the total cost of power delivered by the retail provider (in other words, all costs but distribution and non-by-passable rider costs). Ancillary costs, which include operational costs incurred by PJM, endured some surprising spikes during the unusually cold winter of 2014, but remain a small part of the cost of electricity.
However in recent years, capacity charges have risen dramatically, especially in northern Ohio. Capacity charges, which are the costs incurred by PJM in making generation available on standby for peak consumption requirements, are determined regionally within the PJM territory through three-year ahead auctions conducted by PJM. Northern Ohio will have the highest capacity costs in the PJM territory in 2015, rising to comprise around 30% of the cost of competitive retail price. Imported capacity from the MISO Regional Transmission Organization west of PJM have somewhat mitigated this problem for 2016 and 2017, however high capacity charges remains a significant concern for Ohio consumers. Capacity costs can be managed in part by reducing load during grid peak usage times the summer before the charges are set.
Wholesale energy can be purchased either through bilateral contracts or through spot markets. Most bilateral sales are done through brokerage houses or through hub locations within the Intercontinental Exchange. Spot markets are operated by PJM as either day ahead or real time markets. Locational Marginal Pricing, which is a PJM algorithm that combines elements of generation cost and transmission congestion cost, provides the mechanism for creating the market price. The final bid that clears the required energy sets the price for all energy bid into the market, and is designed to approximate the marginal cost of power production. However concerns that the incumbent utilities may exert too much market power has led PJM to put into place programs to monitor the market.
Distribution and non-by-passable riders form the final portion of the cost of power. These costs are normally billed directly by the local electric distribution utility to the shopping consumer, and are separate from the invoice from the competitive retail provider. The distribution charge is set as a tariff applied for by the electric distribution utility, and approved by the Public Utility Commission. Non-by-passable riders are also charged directly to the consumer by the electric distribution utility, and typically are permitted and approved by the Public Utility Commission or by state law to recover the costs of social programs. Some programs, such as recovery of costs for economic development or demand side energy efficiency programs, have been the source of controversy in Ohio.
In Ohio, energy currently comprises about 50% of the total retail electric bill, with the rest being made up of capacity, ancillary, distribution and non-by-passable riders. As capacity prices increase, energy prices will increasingly comprise less than half the total cost. In the AEP territory, transmission costs are included in the PJM costs passed through to the competitive retail provider, and typically are around 5% of that cost. In other territories in Ohio, transmission costs are billed directly by the electric distribution utility.
For Ohio, constraining electricity costs for manufacturers will require a focus primarily upon shopping for the right commercial retail plan and upon managing the capacity costs. In addition, participation in demand response and energy efficiency programs will likely be important factors in constraining electricity costs. On the policy side, manufacturer advocates will need to monitor potential problems stemming from market power exerted by the incumbent utilities for both the energy and capacity markets. Under current policies, utilities are not incentivized to build new generation in response to high prices, but instead to build new transmission in response to congestion. This may not be the most economical approach for the consumers, however. Often times, the most economical approach for utilities is to maintain congestion, which tends to drive prices higher.