Understanding Capacity Payments
A Capacity Payment is a method of calculating the fees an energy provider will charge a user based on their actual consumption and the maximum energy they need during their peak usage time.
The Regional Transmission Organizations feature payments for capacity in addition to day-ahead or real-time energy and ancillary services of most restructured electricity run by them.
Capacity payments can be significant revenue sources for generators because they are still paid whether or not the power plant produces any electricity.
For example, the same 100 MW generator would still get paid $10,000 per day, even if it produced no electricity.
How Are Capacity Payments Calculated?
Capacity prices are determined distinctively in the seven regional grids.
However, they serve the same purpose of ensuring that the Regional Transmission Organizations (RTO) or independent system operators will retrieve the cost of guaranteeing supply for peak demand.
Below are some of the ways in which capacity payments are calculated.
ISO-NE
ISO-NE supervises the FCM known as Forward Capacity Market, which aims to attract new investment in resources and maintain existing ones where and when needed in the region.
The FCM works to obtain enough capacity for the following reasons:
- To meet expected demand for the next three years
- Attract new resources to constrained regions
- Compensate suppliers for the capacity cost of existing generation
- Penalize those who don't provide enough capacity during a shortage event
NYISO
An auction and bilateral transactions determine NYISO capacity prices.
The NYISO produces a demand curve reflecting different requirements that eventually affect pricing for every capability period.
Capacity is priced on a $/kW-month basis, with prices differing based on the amount of capacity generation bid into the market.
Maintenance, plant outages, mothballing, and more can impact the amount of capacity bid.
Corresponding to this, the price lowers when more excess capacity is available beyond the minimum requirements.
However, if the bid is low and closer to minimum requirements, the pricing will be higher.
PJM
The prices of PJM's capacity are determined by its Reliability Pricing Model, obtaining capacity on a rolling three-year schedule.
The price of a specific capacity for an account is determined by the user's peak load contribution (PLC), wherein PLC is based on the usage of the user's peak demand during PJM's five Coincident Peak Hours.
Thus, the ratio between the annual kWh and capacity tag is a significant determinant of the $/kWh electricity pricing capacity rate component.
Capacity Payment vs. Energy Payment
Capacity Payments are fixed to ensure that adequate generation capacity is available at all times to meet the electricity demand.
Your monthly capacity payments are determined by your actual energy consumption (the kilowatt-hours) and the energy amount that needs to be obtainable to serve your account based on your peak load kW demand.
Energy payment is the opposite of capacity payment, in which you will be compensated only for the power that has been produced.
How to Manage Capacity Costs?
The transmission rates and annual capacity are based on consumption during peak hours. If you reduce usage during peak hours, your demand charges will lower.
One way to avoid paying these high-capacity prices is to sign up for a demand response program with your local utility.
When you do this, you agree to curtail your usage during times of high demand in exchange for a reduced rate on your electricity.
Another way to manage your capacity costs is to install on-site generation.
This can be anything from a small solar array to a large backup generator.
If you have on-site generation, you may still be required to pay capacity charges, but your overall electric bill will be lower because you'll be using less electricity from the grid.
Capacity payments make up a large portion of your electric bill, so it's essential to understand what you can do and how they work to lower them.
By reducing your usage during peak times or installing on-site generation, you can save money on your electric bill and help to keep the grid reliable.
Final Thoughts
Capacity payments are critical to keeping the grid reliable but can be a large expense for customers.
You can save money on your electric bill by understanding how they work and what you can do to lower your capacity costs.
Also, remember that by participating in a demand response program or installing on-site generation, you can help to keep the grid reliable for everyone.
FAQs
1) What is a capacity payment?
A capacity payment is a charge for the generation capacity that you use. This charge is separate from the energy charges for the electricity that you actually consume.
2) How are capacity payments calculated?
Capacity payments are usually calculated based on your peak load consumption during peak hours. Your monthly capacity payments are determined by both your actual energy consumption (the kilowatt-hours) and the amount of energy that needs to be available to serve your account based on the demand of your peak load kW.
3) What will capacity payments mean for end consumers?
The capacity payments will be compensated by putting an extra cost item to end consumers' electricity bills. It means that the price of electricity will go up.
4) How can I reduce my capacity payments?
You can reduce capacity payments by participating in a demand response program or installing on-site generation. Additionally, businesses can collaborate and embrace innovative energy solutions to create a more efficient, reliable, and affordable energy system.
5) Can I save money by reducing my capacity payments?
Yes. By understanding capacity payments and taking the necessary steps to reduce them, you can save money while helping to keep the grid reliable. With increased collaboration and innovative energy solutions, businesses are working together to build a smarter and more sustainable energy infrastructure.
