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What Happens When Electricity Rate Caps Expire?

Posted: April 5, 2008

Your strategy should always be to optimize the use of energy to increase profitability and net cash flow.

The price of electricity has remained nearly constant since 1996 except for a few annual increases averaging about 5%. These modest price increases occurred while the prices of other sources of energy were skyrocketing. But the rate caps for electricity that have kept the electricity prices fairly low are soon expiring. In fact, depending where you live, the rate caps may have already expired. By December 31, 2010 all electricity rates caps in the state will be expired, thus completing the deregulation of electricity generation. Then what?

Of course, no one knows exactly, but allow me to speculate. First of all, the price of electricity will increase. I make this prediction based on the fact that the prices for electricity in other states have increased rather dramatically when the deregulation of electricity generation was accomplished. In Maryland, the price went up by about 70%; in Delaware, the price increase was about 50%; in Maine, it was close to a 100% increase. Predicted price increases for Pennsylvania seem to be in the range of 40 – 70%.

The bottom line with energy management systems will remain unchanged. The strategy should always be to optimize the use of energy to increase profitability and net cash flow.

I predict that the old electric meters that are read monthly will be replaced with advanced automated electric meters (commonly referred to as “smart meters”). Electronic signals from these smart meters will be transmitted back to the utility company on the same lines that distribute the electricity, eliminating the need for meter readers. These smart meters will provide lots of useful information concerning how and when electricity is being used. Savvy customers will be able to use this data to develop demand management programs that can lead to significant cost reductions in the monthly costs for electricity. Who will pay for purchase and installation of the smart meters? It is still being debated whether the customers or the utility companies will pay for the meters. But let’s face it, sooner or later the customer will pay for the purchase and installation of his/her meter.

You will probably have the choice of more pricing options. I expect that each customer will have the choice of: 1) flat rate price for electricity as now; 2) time of day rates with an on-peak rate and an off-peak rate; and 3) hour-by-hour pricing of electricity. If you choose the hour-by-hour pricing (and maybe the time of day pricing), then you would receive an e-mail or FAX by 5 p.m. each day informing you what the rates for the following day would be. Then you would need to decide when and how you would use electricity in the following day. For the customers who choose option #2 and especially option #3, there is going to be quite a learning curve in order to optimize costs for electricity while still maintaining production and performance goals.

The bottom line with energy management systems will remain unchanged. The strategy should always be to optimize the use of energy to increase profitability and net cash flow. Don’t allow yourself to think that the strategy is to simply minimize expenditures for energy. Such a strategy could lead to some disastrous results!

Dennis Buffington, Professor of Agricultural Engineering, Department of Agricultural and Biological Engineering