Skyrocketing capacity costs for FirstEnergy-Ohio customers will significantly increase electricity prices beginning in 2015. Capacity costs, which ensure sufficient electricity can be generated to meet peak demand, will increase nearly 700% by June 2015 and over 1700% by June 2016 for FirstEnergy-Ohio customers. This dramatic rise is due to coal plant retirements reducing available generation in the region. Customers with low load factors, whose electricity usage does not coincide with peak periods, will face especially high capacity costs, with some seeing costs rise to over 7 cents per kWh. The report provides recommendations for customers to mitigate these costs including installing interval meters, curtailing usage during peak periods, and shifting load to natural gas processes.

1. Skyrocketing FirstEnergy-Ohio Capacity Costs:
Revolutionizing Pricing, Contracting, and
Consumption of Electricity
By Matt Brakey, President, Brakey Energy
Understanding Capacity Costs
Introduction Electricity is different from many commodities because
it cannot be economically stored in large quantities.
Exponentially high capacity costs Electricity has no shelf life; it must be produced and
for the 2015/2016 delivery year will consumed simultaneously. For this reason, there must be
significantly increase electricity prices sufficient generation – enough “capacity” – to produce
electricity when demand on the grid is at its peak. If the
for FirstEnergy-Ohio customers.
amount of electricity generated is insufficient to meet
These increases will be so profound demand during these peak times, the lights go out.
that they will drive many commercial
In order to ensure there is sufficient capacity, all
and industrial users out of business. FirstEnergy-Ohio customers pay capacity costs, either
Though the implications are enormous, directly or indirectly, as a component of their electric
most FirstEnergy-Ohio customers bill. Though they vary from year to year, capacity
are unaware of these impending costs have recently constituted a very small portion
of electricity costs. At a fraction of a penny per kWh,
costs and even fewer understand this
it has been easy to discount this relatively minor expense.
complex issue.
However, beginning June 1, 2014, capacity costs in
This report explains what FirstEnergy-Ohio territory will increase nearly 700%.
capacity is, how the capacity market Increases become even more pronounced on June 1,
2015 when these costs will increase more than 1700%
works, how capacity costs impact
from current levels.
FirstEnergy-Ohio customers’ electric
In the FirstEnergy-Ohio region, capacity costs will
bills, and what steps customers can
become the second largest component of electricity prices
take to mitigate the impact of these for most customers. For some individual users, capacity
skyrocketing costs. costs will become the largest portion of their bill. These
costs will be crippling to some large commercial and
industrial energy users.
Brakey Energy | 3309 Glencairn Road | Shaker Heights, Ohio 44122 | (216) 751-1758 | brakeyenergy.com

2. How Capacity Costs Are Determined As a result of aggressive Environmental Protection Agency
(EPA) regulations, several coal-fired power plants in
Capacity costs are determined using a market-based
Northern Ohio and Northwest Pennsylvania are retiring
approach called the Reliability Pricing Model (RPM).
rather than incurring compliance costs. Following these
PJM Interconnection, L.L.C. (PJM) is the wholesale
announced plant closures, PJM realized import capacity
electric market that serves FirstEnergy-Ohio.1 Under
into the region would be constrained. Therefore, PJM
RPM, PJM conducts periodic auctions to obtain sufficient
carved out an independent zone that includes much
generation capacity. Generators – like FirstEnergy
of Northern Ohio and a small portion of Northwest
Solutions and American Electric Power (AEP) – with
Pennsylvania for the 2015/2016 BRA. This zone, known
the ability to generate during peak times, and users with
as the American Transmission Systems, Inc. (ATSI) zone,
the ability to curtail during peak times, participate in
includes all of FirstEnergy-Ohio territory. The cities
the auctions.
of Cleveland, Toledo, Akron, and Youngstown all fall
PJM procures initial capacity for a particular delivery within the zone.
year using a Base Residual Auction (BRA). Though
Table 2 below lists the ATSI zone BRA results for the
smaller incremental auctions are held, the BRA is by
delivery years June 2011 to May 2012, through June 2015
far the largest driver in establishing capacity costs.
to May 2016. While there are some minute differences
Table 1 below shows the result of the BRA auctions
in the 2011/2012 and 2012/2013 delivery years,2 the
for the delivery years June 2011 to May 2012, through
auction results for the ATSI zone have been essentially
June 2015 to May 2016.
the same as the rest of the PJM region.
However, the zone independently
Table 1: BRA clearing price for delivery years 2011/2012 - 2015/2016
cleared at an unprecedented price for
Auction Results 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 the 2015/2016 delivery year.
Resource Clearing
Price per (Megawatt $110.00 $16.46 $27.73 $125.99 $136.00 Comparing Tables 1 and 2, while the rest
per day (MW-Day)
of PJM cleared at a price of $136.00 for
the 2015/2016 period, the ATSI zone
Higher Capacity Costs cleared nearly three times higher at $357.00. This
for FirstEnergy-Ohio significant disparity in capacity costs will be exclusively
shouldered by ATSI zone customers. Additionally, because
Under ideal circumstances, each BRA would have a
capacity costs are based upon a customer’s individual
single clearing price for the entire PJM region. However,
contribution to peak demand on the grid, there will
sometimes PJM identifies impending intra-region
be a wide variance in how these costs are reflected
transmission constraints. A constraint arises
in individual customers’ bills.
when PJM is unable to transmit the
demanded electricity due to congestion on
Table 2: ATSI Zone BRA clearing price for delivery years 2011/2012 - 2015/2016
the grid. In these instances, PJM will carve
out the constrained zone and set a separate Auction Results 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016
clearing price for the zone during the BRA. Resource Clearing
Price per MW-Day $108.89 $20.46 $27.73 $125.99 $357.00
1 PJM Interconnection serves all or parts of Delaware, Illinois, Indiana, Kentucky,
2 he reason for the differences is because the ATSI zone was previously a member
T
Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, of a different wholesale market. MISO, or Midwest Independent Transmission
Virginia, West Virginia and the District of Columbia. The Federal Energy Regulatory System Operator is the wholesale electric market that serves much of the Midwest
Commission (FERC) regulates PJM. PJM falls outside the jurisdiction of the Public United States and Manitoba, Canada. The ATSI zone moved to PJM in 2011.
Utilities Commission of Ohio (PUCO).
2

3. How a Customer’s Capacity Estimating Your Capacity Costs
Costs are Calculated Customers are often confused about how PLCs are
In FirstEnergy-Ohio territory, the capacity costs for an determined. To reiterate, a customer’s individual
interval-metered3 customer that is generation shopping4 five highest peak-demand intervals are irrelevant
are based on its Peak Load Contribution (PLC). A PLC is in determining a customer’s PLC. It is only how the
a customer’s billed electric consumption during the five customer’s usage coincides with PJM’s peaks – hence the
1-hour intervals of the year when demand on the electric term ‘Coincident Peaks’ – that matters for determining
grid is at its highest. Each of these five 1-hour intervals capacity costs
is called a Coincident Peak (CP). PJM identifies these Load factor is a useful tool to estimate capacity costs.
intervals at the end of each summer in which they occur. Load factor is a measure of electric consumption
A customer’s PLC for the following delivery year will consistency. It is the ratio of your average hourly
then be calculated as an average of the five CPs. Once a electric consumption to your highest hourly peak
customer’s PLC is calculated, it is then multiplied by two usage over a billing period.6
factors5 to determine a customer’s capacity obligation. n A
s an extreme example, a 100% load factor indicates
The capacity obligation is then multiplied by the auction that a customer’s electrical draw remains constant
clearing price to determine the customer’s capacity costs. every hour of every day throughout the billing period.
The table below shows the five CP hours for the PJM An example of a high load factor customer is a
RTO for years 2007 through 2011. Although we cannot manufacturing plant that runs three shifts, seven days
predict when these peak-demand intervals will occur, a week and has processes with consistent electric draw.
it is interesting to note some trends. During the past A 24-hour McDonald’s restaurant could also be a high
five years, 88% of PJM’s highest peak-demand intervals load factor customer.
occurred from 4:00 PM to 5:00 PM. In addition, all I
n comparison, a low load factor customer has
n
twenty-five intervals occurred on a weekday during the tremendous variance in its electrical draw throughout
months of June, July or August. the billing period. Examples of low load factor customers
are a foundry whose electrical
Table 3: Top five peak-demand intervals for the PJM RTO for 2007 through 2011 draw spikes when a furnace is
turned on or a bank that is
Year Peak 1 Peak 2 Peak 3 Peak 4 Peak 5 only open eight hours a day,
2007 Wed, 8/8/07, Tue, 8/7/07 Mon, 7/9/07 Thu, 8/2/07 Wed, 6/27/07 five days a week.
4-5 pm 4-5 pm 4-5 pm 4-5 pm 3-4 pm
Though load factor can be
2008 Mon, 6/9/08, Thu, 7/17/08 Fri, 7/18/08 Mon, 7/21/08, Tue, 6/10/08
4-5 pm 4-5 pm 4-5 pm 4-5 pm 4-5 pm
a useful tool for estimating
capacity costs, it is only
2009 Mon, 8/10/09, Thu, 7/17/08, Fri, 7/18/08 Tue, 8/11/09 Thu, 8/20/09 accurate if your highest hourly
4-5 pm 3-4 pm 4-5 pm 4-5 pm 4-5 pm
peak usage coincides with
2010 Wed, 7/7/10, Tue, 7/6/10 Fri, 7/23/10 Tue, 8/10/10, Wed, 8/11/10, PJM’s Coincident Peaks.
4-5 pm 4-5 pm 4-5 pm 4-5 pm 4-5 pm
If it does not coincide, this
2011 Thu, 7/21/11, Fri, 7/22/11 Wed, 7/20/11 Tue, 7/19/11 Wed, 6/8/11, analysis will likely overesti-
4-5 pm 2-3 pm 4-5 pm 4-5 pm 4-5 pm
mate your capacity costs –
3 An interval meter takes snapshots of usage in intervals, and then sends the
5 hese factors are the Forecast Pool Requirement and the Zonal Scaling Factor.
T
information back to the utility. In contrast, a standard meter only records total They account for the zone’s desired amount of reserve capacity and forecasted
consumption and highest demand (regardless of what time of day it occurred) load growth, respectively.
for the billing period. 6Load factor is calculated by dividing the kilowatt hours consumed by the product
4 n Ohio, electricity customers have the option to purchase their electric generation
I of the billed load (in kilowatts), the number of days in the billing period, and the
from third-party competitive retail electric service (CRES) providers. Customers number of hours in a day. Stated mathematically, Load Factor = kilowatt hours ÷
who elect to do so are “generation shopping.” (kW x days x 24 hours).
3

4. sometimes significantly so. Detailed analysis of your or exceed the current base price of electricity.7 The
historical consumption during past CPs is required for below graph shows the dramatic increase.
more precise estimates.
Capacity costs for customers with load factors below
Using load factor, Brakey Energy has estimated the 20% increase exponentially, and would distort the scale
ATSI zone’s retail capacity costs for customers in cents of the graph. For that reason, and that reason alone, they
per kilowatt-hour (kWh) for the 2011/2012 through were not included in Figure 1. Because there are many
2015/2016 delivery years. For customers with load customers with load factors below 20%, Table 4 itemizes
factors less than 40%, capacity costs could easily meet the estimated costs for the entire range.
Figure 1: Capacity costs per kWh for 2011/2012 - 2015/2016 delivery years based on load factor
8
7
6 20%
Average Cost in Cents per kWh
30%
5
40%
50%
4
60%
70%
3
80%
2 90%
100%
1
0
2011/2012 2012/2013 2013/2014 2014/2015 2015/2016
Table 4: Estimated capacity costs in cents per kWh, based on load factor for 2015/2016 delivery year
99% 90% 80% 70% 60% 50% 40% 30% 20% 10% 1%
1
.60¢ 1.61¢ 1.81¢ 2.26¢ 2.71¢ 3.17¢ 3.62¢ 5.43¢ 7.23¢ 14.47¢ 144.70¢
4

5. Recommendations:
How to Mitigate the Impact of Capacity Costs
on Your Business
If you are a FirstEnergy-Ohio customer, there are several strategies you can use to
limit exposure to high capacity costs. All of these strategies require understanding
how your organization consumes electricity, when your individual peaks occur,
and how these peaks coincide with PJM’s CPs. The following steps may help you
mitigate impending capacity costs:
1. nstalling an Interval Meter
I rescheduling load for a few hours during these identified
days can significantly minimize capacity costs for the
If you have a favorable load profile, it is important that
following delivery year. As an extreme example, if interval
you install an interval meter. Without an interval meter,
meter readings indicated you had no consumption
the utility determines capacity costs based on a pool
during the five CPs, your capacity costs for the following
average, not your actual usage. Brakey Energy estimates
delivery year would be zero.
that a customer without an interval meter will incur
capacity costs of roughly 3.5¢ per kWh beginning June Your capacity costs are calculated as an average of the
2015. Installing an interval meter can dramatically reduce five CPs. Thus, even if you are able to curtail during only
certain customers’ capacity costs. For example, analysis a few of the five occurrences, you can still benefit.
has shown a 24-hour McDonald’s restaurant could save
well over 1¢ per kWh. A foundry that melts off-peak can 3. hifting Electric Load to
S
virtually eliminate their entire capacity costs. Natural Gas Powered Processes
However, installing an interval meter can have the Natural gas storage levels are at all-time highs, and prices
opposite effect for a customer with a load profile less are near 10-year lows. You should investigate the cost-
favorable than the pool average. For example, a tanning effectiveness of offsetting electric usage with natural gas.
salon has especially high air conditioning usage during
CP times to counteract not only the hot weather, but 4. Energy Efficiency Measures
also the waste heat from the tanning beds. This customer
Energy efficiency measures that decrease consumption
should not install an interval meter.
potentially have the additional benefit of decreasing
Still, for many customers, an interval meter is the easiest capacity costs. This would be true if the measures offset
and least expensive step to minimize exposure to high consumption during CPs. However, for those energy
capacity costs.8 efficiency measures that do not reduce consumption
during CP times, such as outdoor lighting, payback
2. eak Demand Curtailment
P analysis should account for no reduction in capacity
in Response to Capacity Alerts costs.
You cannot know the date and time of the five CPs until
the summer is over. However, peaks typically coincide 5. On-site Generation
with hot weather. Furthermore, careful monitoring of You can reduce capacity costs through on-site generation
PJM’s wholesale market allows you to track demand during CP times. You should investigate installing
on the grid minute by minute. Combining these and natural gas, diesel or other fuel-driven generators for this
other indicators, you can identify 10 to 15 days during purpose. Even more importantly, you should leverage
the year when CPs will most likely be set. Curtailing or any existing on-site generation capabilities.
7 The base price of electricity is the price of the commodity – the electron – plus
8 n FirstEnergy-Ohio territory, it costs approximately $1,500 for a digital meter and
I
ancillary services. At the time this paper was authored, many customers could $500 for an analog meter. Contact your distribution utility if you are interested
secure the commodity and ancillary services for under 4¢ per kWh. in installation.
5

6. 6. Demand Response Programs Beware: If you fail to curtail the agreed upon load when
called upon, you may forego all program payment and
Demand response programs provide payment to
potentially even be responsible for damages.
customers in exchange for the willingness to curtail
electric consumption when the electric grid is under
extreme stress. These programs are available in 7. Generation Contract Negotiation
FirstEnergy-Ohio territory. If the wrong generation contract is selected, many of the
above recommendations will have no impact on your
Payment varies based on (1) the demand response
capacity costs. Capacity costs are assessed by PJM to a
program; and (2) the total amount of consumption
customer’s generation supplier. Most suppliers pass on
the customer is willing and able to curtail relative to
these costs to the customer as a bundled component
the PLC it set during the previous summer. Payment
within their contracted price. Suppliers formulate their
is generally split with the customer’s Curtailment
offers by looking at a customer’s historical PLCs. If a
Service Provider (CSP).9
customer takes action to minimize its usage on CP days
If your business successfully minimized load during during the term of the contract, the price to the customer
CPs, then the opportunity to participate in a demand remains unchanged. Therefore, if you intend to minimize
response program is minimal. Although minimal usage on CP days, you should negotiate a generation
consumption during the five CPs means low capacity contract with a capacity pass-through provision. A capacity
costs, it also means there is minimal ability for you to pass-through provision results in your organization paying
further curtail against your established PLC. the actual Peak Load Contribution (PLC) it incurs, not the
It is typically more lucrative to curtail usage during CPs PLC estimated by a supplier pricing formula.
than it is to participate in a demand response program. Taking proactive steps to mitigate capacity costs results in
Your capacity costs will likely be greater than what you other savings opportunities. High wholesale generation
would be paid for participation in a demand response prices coincide with CPs. Likewise, a CP determines
program. Furthermore, you have to share your demand transmission costs. If consumption is minimized during
response program payment with your Curtailment Service these CP days, high wholesale prices and transmission
Provider. Still, if you have not successfully managed your costs can be offset. Therefore, it is critical that the
CPs, or do not want to invest the necessary time and generation contract you negotiate allows you to capture
resources to do so, a demand response program is a all these ancillary benefits.
viable alternative.
Conclusion: Simple Steps Will Result in Big Savings
High capacity costs for the 2015/2016 delivery year will significantly impact electricity prices for
most customers in FirstEnergy-Ohio territory. The consequences for many businesses will be dire.
Even though these facilities could take relatively simple steps to shield themselves from the bulk of
these costs, many will not. As a result, some of these companies will be forced to close their doors.
If your organization is in FirstEnergy-Ohio territory, you must become knowledgeable about capacity
costs. By identifying how and when you presently consume electricity, you can take proactive steps
that will significantly reduce your future capacity costs.
9 CSP implements the necessary equipment and systems to enable demand
A
response for customers. The CSP is responsible for managing a portfolio of
customers to meet capacity obligations and avoid creating an operation problem
on the transmission grid.
6

7. Glossary of Terms
American Transmission Systems, implements the necessary equipment Megawatt (MW):
Inc (ATSI): and systems to enable demand One million watts.
This zone, which includes Northern response for customers.
Megawatt Day (MWD):
Ohio and Northwestern Pennsylvania,
FirstEnergy-Ohio: One megawatt of electricity used in
set a separate clearing price from the
FirstEnergy’s Ohio electric distribution one day.
rest of PJM during the 2015/2016
utilities: the Illuminating Company,
capacity action. Midwest Independent Transmission
Ohio Edison and Toledo Edison.
Base price of electricity: System Operator (MISO):
Generation shopping: The wholesale electric market that
The base price of electricity is the
In Ohio, electricity customers have serves much of the Midwest United
price of the commodity – the
the option to purchase their electric States and Manitoba, Canada. The
electron – plus ancillary services.
generation from a third-party retail ATSI zone was previously a member
It does not include capacity charges.
supplier. Customers who elect to of MISO and moved to PJM in 2011.
At the time this report was authored,
do so are generation shopping.
many customers could secure the Peak Load Contribution (PLC):
commodity and ancillary services Interval meter: A customer’s load contribution to
for under 4¢ per kWh. An interval meter takes snapshots PJM’s five 1-hour intervals of the
Base Residual Auction (BRA): of usage in intervals, and then sends year when demand on the electric
the information back to the utility. grid is at its highest. An average of
Auction that allows for the procure-
In contrast, a standard meter only these five peak-demand intervals
ment of resource commitments
records total consumption and determines PLC.
to satisfy the region’s capacity
highest demand (regardless of what
obligation and sets the costs PJM Interconnection, LLC (PJM):
time of day it occurred) for the
customers will pay for capacity. The wholesale electric market that
billing period.
Capacity: serves all or parts of Delaware,
Kilowatt (kW): Illinois, Indiana, Kentucky, Maryland,
The amount of electricity available
Unit used to measure electric load, Michigan, New Jersey, North Carolina,
on the grid at any one time, measured
equal to 1,000 watts. Ohio, Pennsylvania, Tennessee,
in megawatts (MW).
Kilowatt hour (kWh): Virginia, West Virginia and the
Certified Retail Electric Service District of Columbia. The entire
(CRES) provider: Unit used to measure electric
state of Ohio is served by PJM.
consumption, equal to 1,000 watt
A person or entity that is certified by
hours. It is the billing unit of Reliability Pricing Model (RPM):
the Public Utility Commission of
electricity delivery to consumers A capacity market model used by PJM
Ohio to offer and to assume the
and is the product of power, in watts, to manage the availability of capacity.
contractual and legal responsibility
and time, in hours. The RPM provides procurement of
to provide competitive electricity
supply to customers Load Factor: capacity for each delivery year, three
years in advance, through a competi-
Coincident Peak (CP): Measure of electric consumption
tive auction process called the Base
consistency. It is the ratio of your
The unrestricted load of a customer, Residual Auction (BRA). This
average hourly electric consumption
coincident with one of the five long-term RPM approach includes
to your highest hourly peak usage
highest 1-hr peak demand intervals incentives that are designed to
over a billing period. Load factor is
for PJM. stimulate investment in maintaining
calculated by dividing the kilowatt
Curtailment Service Provider existing generation and to encourage
hours consumed by the product of
(CSP): the development of new sources of
the billed load (in kilowatts), the
capacity
A CSP is responsible for managing number of days in the billing period,
a portfolio of customers to meet and the number of hours in a day.
capacity obligations and avoid Stated mathematically, Load Factor =
creating an operation problem kilowatt hours ÷ (kW x days x 24
on the transmission grid. A CSP hours).
7

8. About the Author About Brakey Energy
Matt Brakey is an expert on energy markets and securing Brakey Energy is the energy management partner of
and negotiating third-party energy contracts and a Ohio’s largest energy users. We provide comprehensive
frequent speaker and seminar presenter on Ohio energy management services to commercial and industrial
energy issues. businesses in Ohio, helping companies identify and
implement energy-saving measures to reduce energy costs.
As President of Brakey Energy, Matt directs the delivery
of all services provided to the company’s clients and Brakey Energy has unmatched knowledge of Ohio’s
oversees all operations. complex energy regulatory environment. We can help
you determine how changes in capacity costs will affect
Matt is serving his second two-year term as Chairman
your business and how to reduce the impact on your
of the Industrial Energy Users of Ohio (IEU-Ohio),
bottom line.
an alliance of energy users that works with regional,
state, and national energy stakeholders to achieve Call us at (216) 751-1758
reliable electricity at reasonable prices. or visit us online at brakeyenergy.com.
Matt has a B.A. from Miami University. He is pursuing
a J.D. evenings at Cleveland Marshall College of Law.
Brakey Energy | 3309 Glencairn Road | Shaker Heights, Ohio 44122 | (216) 751-1758 | brakeyenergy.com
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