How Severe was the Polar Vortex on Electricity Prices?
The polar vortex caused electricity prices to spike in January, but the real sticker shock for customers may only be just beginning. Customers could be charged an additional 1 to 3 percent to make up for additional costs incurred by their suppliers.
The Energy Research Council (ERC) just released a report, Polar Vortex Effect on Electricity Prices that discusses how peak demand led to increased costs.
That’s because grid operators incurred dramatically higher “ancillary” costs to ensure grid reliability. The potential for extreme price spikes exists in the regional transmission organization that bore the brunt of the vortex, PJM.
PJM coordinates the movement of electricity in 13 states and passed these costs to electricity suppliers. Those suppliers are now faced with the decision to either absorb the ancillary costs or pass through the costs to customers as a one-time-only line item on a future electricity bill.
On January 6, 2014, temperatures in key regions of the US dropped to an average of minus 10 degrees F and record-breaking temperatures occurred throughout PJM. Records for energy demand and consumption were also recorded.
To avoid brownouts and blackouts in January 2014, PJM appealed to the Federal Energy Regulatory Commission (FERC) to lift a $1,000/MWh cap. FERC approved the request, allowing PJM to recover costs above $1,000/MWh. Consequently, PJM passed these costs to suppliers.
Many supplier contracts have “pass-through” or “change-in-law” provisions, which can affect a customer’s electricity bill. FERC’s lift of the PJM cap may be considered a “change in law.” Therefore, suppliers have the option to pass through the costs to customers as a one-time-only line item on their electricity bill.
ERC reports that one supplier that decided to pass through costs to commercial and industrial customers is basing the charge on each customer’s actual usage for January 2014. The charge is anticipated to be 1 percent to 3 percent of each customer’s total annual spend on electric supply.
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