How to Buy Electricity
There are many forms of heating fuel:  natural gas, propane, No. 2 heating oil and electricity are the most popular.  Some rural homes have started to use wood chips.   Industrial complexes, college campuses and some commercial buildings have turned to cogeneration which generates heat for steam and hot water as a by product of electricity generation.

These consumers may use different kinds of fuel for heat.  But they all have one thing in common.  They all use electricity.

With the exception of a handful of trolls and forest dwellers, everybody needs electricity. 

Since the days of Edison and the birth of the monopolistic public utilities, consumers have taken electricity for granted.  Flick a switch and the lights go on.  Plug into a socket and the toaster heats up.  Turn down the thermostat and the central air conditioning turns on.

All electricity is delivered through the wires that run through every city, suburb and rural area.   In most states, the utilities are still the source of electricity.  But in over 20 states and the District of Columbia, consumers now ask themselves, “How can I buy electricity?”

There are three potential sources for electricity supply and one source of “negative” supply

Utility supply

Most publicly-owned utilities still provide electricity supply to their consumers.  The only state-wide exception is Texas where all utilities exited the supply function several years ago.  Texas consumers must buy their supply from a third party competitive marketer today, one that may be affiliated with a regulated utility but operates separately.

Utility prices are set pursuant to tariffs approved by state utility regulators.  These tariffs require that utilities pass through to consumers their cost of electricity supply without a profit margin.  

The cost of electricity might be based on the price they pay for electricity from independent power plant operators.  Or it might be based on the cost of fuel used by the utility to generate power plus an allowance for Operations and Maintenance of the power plant.

Consumers of utility electricity pay a charge for the supply and a separate charge for transmission and distribution (T&D).  The utility may also impose certain charges imposed by state regulators such as social benefit charges intended to help the poor meet their energy bill payments.  A billing charge is sometimes added.

Some large commercial consumers of the utility are charged demand charges.  The price of demand is assessed on the highest hourly consumption during a month.   The highest hour might reflect a surge in electricity consumption brought on by turning on major appliances such as chillers, boilers and furnaces.  The demand charge reflects the cost of maintaining capacity on the utility’s electricity supply system to meet the simultaneous demands of these commercial consumers with their surging consumption.

Competitive Supply

Over 20 states and the District of Columbia permit consumers to buy electricity supply from third party suppliers other than the regulated utility.  These third parties are referred to as energy supply companies (ESCOs) or competitive energy suppliers.   Consumers can usually choose to buy from the local utility or an ESCO although in Texas all consumers are required to purchase from a third party supplier even if it is a subsidiary of a regulated utility.

ESCOs offer consumers supply but use the wires of the regulated utilities to deliver supply to their customers.  Customers receive a bill that reflects the ESCO’s price plus the price of T&D.  In the case of commercial customers a demand charge will also be imposed.   

Some ESCOs bill separately for their supply charges and leave it to the utility to bill for T&D and demand, if any.  Many utilities offer consumers what they call “consolidated billing.”  In a consolidated bill the consumer is billed indirectly for supply from a third party supplier as well as for the utility’s T&D and demand charges.  The utility then forwards amounts received for supply to the ESCO.  Most utilities deduct a small percentage of the ESCO’s supply payments -- .5% to 1% -- to cover their billing costs and bad debt exposure.

Unlike utilities which are required to pass through to consumers their costs without a markup, ESCOs charge consumers for their costs plus a profit margin.  Likewise, unlike utilities which only offer consumers the current market price of electricity, ESCOs can offer consumers a variety of products including long term hedge products, seasonal fixed price and variable products, and options that protect consumers from higher prices but allow them to enjoy lower prices if market prices drop.

Renewable Energy

Consumers who invest in solar and wind projects can replace utility supply.  In that case the consumer will pay the renewable energy project developer.  The payment for renewable energy can come in 3 basic forms:
  • Amortization of loans borrowed by the consumer to pay for the renewable energy project
  • Lease payments made to the owner of the renewable energy installation; or
  • A price per kilowatt hour of electricity produced by the project (known as a PPA payment after the Power Purchase Agreement that the consumer enters into with the renewable energy developer).

Demand Side Management (DSM)

Some consumers are now receiving payments for electricity they do NOT consumer.  Utilities and non-profit independent system operators (ISOs) that run the regional grids have encouraged consumers to reduce their consumption in peak times. 

As an incentive the utilities and ISOs are willing to pay consumers for such reductions.  The payments are less than the value of the capacity that would need to be built for the grid to meet the requirements of all consumers.

DSM supply is sometimes called “negawatts” as opposed to megawatts:  Energy that is not consumed rather than energy that is.