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Flexible Marketing: Incorporating Rate-Structure Choice as Part of a Larger Retail Energy Strategy

One of the foundational attributes of deregulated electricity markets is consumer choice. Retail Electric Providers (REPs) offer end-users choice in how they source the power flowing into their homes and businesses.

08 / 22 / 2018 Power Trevor Safko, Analyst

One of the foundational attributes of deregulated electricity markets is consumer choice. Retail Electric Providers (REPs) offer end-users choice in how they source the power flowing into their homes and businesses. Historically, technical metering limitations, Electronic Data Interchange (EDI) support and utility billing systems presented challenges to REPs seeking to offer a wider variety of products to their consumer base. Even with recent improvements in technology, many utilities still rely on load-profiling for the purposes of wholesale settlements with the ISO. As a result, REPs have typically presented potential customers with simple fixed-rate, monthly variable-rate, or index contract structures providing limited choice and opportunities for REPs to differentiate. Enhancements in advanced metering infrastructure (AMI), EDI systems, and dynamic pricing models over recent years unlock previously unavailable complex billing products for mass market customers.

Fixed-rate contracts, which mirror most local utility rate structures for small volume accounts, are easily understood by both electricity suppliers and consumers. To accurately price these accounts, it is important to maintain precise forecasts for fixed and variable cost components recovered by the ISO. Execution risk associated with less liquid hedging products, rapid market moves, shaping risk, and swing risks associated with temperature deviations should also be priced into any contract. The rates offered by REPs typically cluster around or below the local utility’s ‘Price to Compare’ or standard fixed rate where one exists. This rate structure becomes difficult to benchmark in NYISO and ERCOT where standard fixed rate structures are not available from a local utility.

In contrast, variable-rate structures offer the consumer the ability to participate, albeit superficially, in the wholesale markets. REPs offering variable contracts typically use these rate structures to recover deviations between forecasted and actual wholesale costs incurred from previous settlement periods. These contract structures are increasingly under fire from regulators and are often cited as a significant reason for low consumer satisfaction for the retail energy industry as a whole.

Some consumers are interested in a more direct participation in the wholesale markets. A more granular approach to wholesale pass-through contracts is the index rate structure. Index contracts first rely on interval usage data, which is not typically available for monthly metered (typically residential and small commercial) customers. In order to deliver an index contract to a monthly metered account, one first must put the usage of a given account at the hourly level into intervals. As discussed in the first article of this series, intervalizing a monthly meter read is either accomplished with AMI technology and reading consumption hourly or sub hourly, or by applying hourly load-profiling strategies to extract hourly usage information from a monthly meter read. The hourly usage is then indexed against a wholesale pricing point (BGE Load Zone, West Hub pricing node, ERCOT North Load Zone, etc.) to pass-through the wholesale cost of energy for the account. An additional volumetric charge ($/MWh) is usually billed to the account to cover the costs associated with various demand, ancillary service, shaping-risk, and administrative charges. The REP margin is also included in this volumetric adder, which can be broken out into separate billable line items for each account depending on the technical capacity of the Billing Provider.

As EDI and Billing Providers grow more sophisticated, and AMI technology continues to penetrate the deregulated energy markets, it is possible to offer every account a customized rate structure that includes variations on the above contract types. This may include Peak and Off-Peak pricing, block and indexed products, free nights or weekends, and complete wholesale pass-through contracts which bill accounts based on their actual wholesale costs (i.e., account-specific capacity charges) with a monthly membership fee. It is evident that managing a portfolio with a variety of complex billing products requires a precise risk management and portfolio optimization strategy. Incorporating specific rate structures into a targeted marketing campaign can only be accomplished with the appropriate back and middle office resources, planning, and execution. To learn more about the deployment of complex rate structures, and how to incorporate them into targeted marketing campaigns, contact GP Energy Management.