November 2024 Volume 6

ENERGY

SKYROCKETING CAPACITY COSTS AND THEIR IMPACT ON YOUR ENERGY SPEND By Nancy Gardner

O ne of the largest line items on your energy bill is for some thing called “capacity costs,” an amount you pay to ensure your energy provider can fulfill your energy needs at all times (especially times of heaviest use; i.e., that they always have the capacity to keep your lights on and forging equipment firing). Some thing big recently happened that is going to negatively impact your capacity charges if you operate plants in PJM, the Regional Trans mission Organization that manages the electric grid across 13 states (DE, IL, IN, KY, MD, MI, NJ, NC, OH, PA, TN, VA, WV) and the District of Columbia. While many FIA members do have manufacturing facilities in PJM, the dynamics impacting capacity costs described in this article are also at play across the U.S., so please take note. Wherever you do business, capacity and other ancillary charges are generally on the rise, making the task of managing energy budgets increasingly complex. That said, here’s what you need to know. On July 20th, 2024, PJM announced the results of its annual Base Residual Auction (BRA) for the 2025-2026 delivery year (06/01/25 05/31/26). This auction sets the capacity prices that power providers must pay to ensure reliable electricity supply. As a result, PJM reported a 750% WEIGHTED AVERAGE INCREASE in capacity costs compared to the prior year. This will have a significant impact on your organization's energy bills.

• This dramatic rise in capacity prices is driven by several factors, including fewer power plants bidding into the auction, fore casted growth in electricity demand, and regulatory changes. How Can You Mitigate the Impact? While the capacity price increase is unavoidable, there are steps you can take to manage the other half of the capacity cost equation - your electricity demand: • Implement Demand Response programs to reduce usage during peak hours. • Deploy energy management software to optimize your facilities' energy consumption. • Explore load shifting, energy efficiency, and energy storage solu tions to lower your Peak Load Contribution (PLC) values.

Frequently Asked Questions What is the Expected Cost Impact?

Nearly every third-party supply agreement covering electricity rates within the PJM service territory includes language to adjust for changes in capacity costs relative to the results of the annual Base Residual Auction. Utility supply tariffs are similarly structured to pass through any cost increases or decreases relating to capacity auction prices. In 2024, capacity accounted for an average of 7-8%

of total electric supply costs. Considering the RTO-average increase from $28.92 to $269.92 (+833%), that figure is set to increase substan tially. Cost adjustments will depend on a variety of factors (utility, rate class, load factor, etc.) but initial projections point to an estimated increase between $0.010 - $0.016 per kWh. Why Did Capacity Costs Increase? PJM sited three primary drivers of higher capacity prices: 1. Fewer offers into the auction - due to power plant retirements, the number of assets entering bids into the auction was less than in prior years.

What Does This Mean for You? • Capacity costs, which typically account for 7-8% of your total electricity spend, are set to rise substantially. • Your third-party supply agreements and utility tariffs include provisions to pass through changes in capacity costs, so you will see these increases reflected in your energy bills regardless of your energy buying strategy.

2. Forecast growth - increasing reliance on electricity in the trans portation, data center, and heating sectors is expected to drive demand growth. 3. FERC implemented several market reforms including measures to adjust for extreme weather and verify each resource's ability to perform as intended.

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FIA MAGAZINE | NOVEMBER 2024