Navigating the intricacies of commercial electricity rates and learning how to shop for energy plans can be a daunting task for any business. In this guide, we dive into the various elements that shape commercial energy rates, exploring how they differ across regions, and discuss the best ways to perform a commercial energy price comparison. Our goal is to equip you with the knowledge to effectively assess and choose the most suitable energy rate for your business, understanding not just the costs involved, but also the anatomy of your electricity bill. After reading this article, you should be able to confidently compare business energy plans and perform an effective commercial energy price comparison analysis.
What Are Commercial Energy Rates? Are They Different From Residential Rates?
Commercial energy rates vary quite dramatically from residential rates. Although all electricity rates in deregulated energy states are derived from the wholesale electricity market, the way they are priced by retail energy suppliers varies widely. Because business energy consumption is often much greater than energy consumption in a home, there are many additional variable costs that suppliers consider when setting the price of a commercial rate. Let’s explore some of the key factors in more detail below.
Electricity Commodity
First and foremost, is the cost of the physical electricity coming into your building. Power prices change frequently based on consumer supply and demand, so electric suppliers often utilize energy futures markets in order to secure fixed power prices for their commercial users. In a commercial building, whether it is a small pizza shop or a large manufacturing plant, electricity usage can be quite volatile. In order to properly forecast the total amount of electricity required to supply a commercial customer, the supplier often analyzes the specific historical usage patterns of the business. This is quite different from residential electricity pricing, as most homes use power in a similar fashion.
Electrical Transmission
Another key aspect of a commercial electricity rate is electrical transmission, or the cost of transporting the power from the plant to your local utility. Transmission charges are often bundled in your price for electricity and are not widely known. These costs are predicated on a business’s total demand for electricity each billing cycle and can vary drastically depending on usage. Transmission costs are another key reason for custom energy rates that are tailored to a commercial user’s needs.
Electric Capacity
Like transmission costs, electric capacity is billed based on your business’s total demand for power. Most residential customers have a similar demand structure, and hence, a similar cost for capacity. In the commercial sector, however, these costs are greatly different from business to business. While capacity charges are often included in your total electricity supply rate, this is another key aspect that makes commercial energy pricing so different.
Why Do Commercial Energy Rates Change By State?
You might be wondering why your electricity rates are so different from a friend who might own a business in a different state, or even in a different part of your own state. Let’s explore why electricity prices change based on the location of your business or commercial building. This is an important factor when performing a commercial energy price comparison.
Local Utility Tariffs
First, each local utility company sets its own electric rate tariffs that impact how electricity rates are calculated. In regulated states, there are several different commercial tariff schedules available to customers based on their individual usage patterns. In deregulated energy states, there are typically a few standard commercial rate tariffs available to business customers. Tariffs affect how utility delivery costs are determined, as well as the total rate for electricity supply offered by the local utility company.
Local Congestion
The price of electricity in each region of the country is based on the wholesale electricity market, and these prices are determined by the cost of total available electricity supply in that region of the country.
On a more local level, however, electricity grid congestion plays an important role in setting prices. Electricity congestion is similar to traffic in a major metropolitan city. At rush hour, it is more expensive to take a taxi cab from upper Manhattan to lower Manhattan due to the total amount of time spent in traffic. The electric grid works in a similar way to the taxi meter. When there is not much demand on the local grid, prices are low. But when demand is high, prices rise. This is the main reason why electricity prices can change so drastically from location to location.
Transmission & Capacity Rates
Another key aspect that affects how commercial electricity rates are calculated in each region of the country is how transmission and capacity rates are set. Each electric grid operator throughout the U.S. holds several auctions to determine the price of transmission and capacity for its customers. And, these rates are not only set at the grid level, but also at the local utility level. So, customers in one part of New Jersey will pay a different price than customers in another part of the state.
What To Consider When Comparing Business Energy Plans
When trying to determine the best commercial energy plan for your business, c are many factors to consider. In an effort to better serve our customers, we created a list of taks to help you compare business energy plans:
Determine Your Energy Goals
Deciding what is most important to your business is the first step. Are you more interested in cost savings compared to budget certainty? Is renewable energy important to you? After you create your business energy plan, you can then move on to the next step.
Evaluate Your Usage Patterns
Most commercial energy customers are not energy experts, so hiring an energy broker and utilizing his/her services might be your best option here. It is imperative to request historical energy usage data from your utility in order to understand how your building performs and to compile an effective commercial energy price comparison. This data will show your daily, monthly, and annual kilowatt hour (kWh) readings as well as your peak demand figures that ultimately impact your rate.
Decide On Your Risk Tolerance
Next, based on your energy goals and usage profile, it’s time to create a risk profile. Certain energy usage patterns can handle more market risk than others. For example, very consistent energy loads that burn on and off peak might be able to tolerate more index market risk when compared to volatile energy usage behavior. Your energy brokerage firm should be able to guide you here.
Gather Price Quotes From Suppliers
After you have decided on the type of product you would like to price based on your goals, usage history, and risk tolerance, it’s time to start shopping. Compile an RFP and send it to the top retail energy suppliers. They will, in turn, offer price proposals that outline total costs and contract terms. Utilizing the services of an energy broker to gather multiple price quotes can streamline this process.
Evaluate Offers & Negotiate Contract Terms
Finally, you will need to evaluate price offers from suppliers to see which is the most favorable. During this phase it’s important to compare like with like, so be sure that each quote contains the same parameters (tax, bandwidth allotment, price components, etc). During this step, you might also want to request and review the details of the supplier’s contract in order to negotiate favorable terms for your business.
Switching Or New Contract?
Whether you are switching energy providers or entering into a new contract, the same rules apply. Some common things to consider in your next energy contract include: early termination fees, contract renewal clauses, energy pass through charges, and the type of utility billing. Either way, it is important to utilize the services of an energy broker when negotiating with energy suppliers so that you know you are getting the best deal for your business.
Do You Need Help Evaluating Business Energy Rates?
Commercial energy rates and contracts can be complex and overwhelming, so having a trusted advisor in your corner can make all the difference. At Diversegy, our team of experienced energy professionals has over 100 years of combined experience helping our customers negotiate commercial energy prices. Contact us today to learn more about our energy broker services and to secure the best plan for your organization.
