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Customers Interrupted

Utilities that are short on capacity and operate in a stable regulatory environment may be able to extract value from interruptible rates.
Fortnightly Magazine - October 1 2003

be used as financial benchmarks for an interruptible rate.

  • Forward Contract for Regulatory Capacity
    • Description: A contract that meets the requirements for MAIN-accredited capacity usually purchased for peaking season only. Any energy purchased under this contract is at market rates.
    • Period: Monthly or seasonal
    • Price: 15,500 MW-season or $3.88 KW-mo
  • Long-term Tolling Contract
    • Description: A contract similar to the lease of a plant (or portion of a plant's capacity) in which the purchaser supplies the fuel and receives the energy at cost. The seller continues to operate the plant.
    • Period: Multi-year contract (, five years)
    • Price: $60,000 MW-year or $5.00 KW-mo
  • Overnight Cost of Building or Purchasing a Plant
    • Description: Utility builds or purchases a built plant.
    • Period: Life of plant
    • Price: $500-$350 kW or $6.25-$4.38 kW-mo

From the list above, the value of peaking capacity is in the range of $6.25-$3.88 kW-mo. These capacity values are subject to changes in the market. Also, remember that the utility's need for capacity (capacity position) changes every year. Therefore, the incremental value to the utility of peaking capacity will change every year. Due to both of these issues, an interruptible rate needs to allow re-evaluation of the capacity value periodically.

The Energy Value

The majority of a peaking plant's energy cost is fuel. A utility has several options in structuring this portion of an interruptible tariff. The energy cost could be calculated on a yearly, seasonal, monthly, or daily interval. The longer the interval, the more risk the utility will assume. If the energy costs are based on a yearly average of the forward gas price curve and actual gas prices swing low during the interruptible season, the utility would be required to pay above- market energy cost to the interruptible customers or avoid interruptions. The reverse situation could occur and the utility would receive "above market" value by calling an interruption. To minimize this risk, the energy portion of the tariff should be based on the day-ahead price.

If the utility refunds the full energy cost to the customer, the interruption would end up costing the utility more than the cost of operating a CTG. For example (scenario 1a in Figure 2), if a utility receives $20/MWh from the customer for energy customer usage, fuel prices are $40/MWh, and incremental system costs are $40/MWh, in an interruption, the utility would lose the $20/MWh from the customer and pay the customer $40/MWh for curtailing. The result is that the utility's costs are -$40/MWh. If the utility decides not to curtail (scenario 1a), it receives the $20/MWh from the customer and pays $40/MWh for fuel, with the result of -$20/MWh. Under these conditions, the utility would be better off not curtailing the customer's load.

The goal of valuing the interruptible rate is to make demand-side and supply-side options equivalent. As shown above, any energy credit based on fuel cost needs to be discounted to maintain equivalency. Applying this principle and using the conditions of the previous example, in an interruption the utility would lose the $20/MWh from the customer and pay the customer $20/MWh for