Understanding Generation Capacity & Capacity Tags

CI.EN.DG Understand Capacity and Capacity Tags_600x250

Unlike some other forms of energy, electricity cannot be stored. This means that it must be generated and consumed at the same time. Capacity helps generators understand how much electricity they need to provide to the grid to ensure that electricity always remains available to all consumers.

A real-life example to help explain capacity

Here’s a simple way to understand the concept of capacity. Think of it as a parking lot at a mall. Ample spaces must be installed to accommodate shoppers on the busiest shopping day of the season. Capacity provides sufficient generation (or a parking spot) for the hottest day/hour of summer. Grid operators must work with generators to guarantee supply meets demand and capacity charges are paid to ensure you have electricity when you need it.

What’s the impact of capacity on your power costs?

Capacity represents a significant portion of your electricity spend. It comprises about 25% of your total energy bill, which is the second highest cost component (after the energy portion).  

When it comes to your bill, the overall capacity charge is comprised of the capacity cost and the capacity tag cost.

How are capacity charges set?

Though consumers can’t participate in setting the price, capacity charges aren’t arbitrary numbers assigned by generators. Typically, competitive auctions determine the price for the area being served. Before each auction, the grid operators provide estimates for peak electricity usage for their region. This amount is known as the forecasted demand, as shown in the graph below. Resources then bid in existing power plants, new power plants, imports, demand response and energy efficiency initiatives. The auction is designed to ensure that there is enough capacity to meet the estimated peak usage plus a reserve margin, which is a cushion for unforeseen events. All cleared bids are a commitment. If a capacity resource is not available when needed, a financial penalty is determined for that resource owner. It is important to note that capacity pricing changes each auction year.

What is a capacity tag and how is it determined?

A capacity tag is the total kilowatt hours used by your facility on the peak hour(s) of the peak day(s). Each consumer is assigned an individual capacity “tag.” Your capacity tag is tied to the number of capacity units that the business will require on the peak demand day(s) of the year.

On an annual basis, each utility or distribution company is required to calculate and report its peak load contribution to their grid operator. At the end of the summer season, they will calculate the highest peak load hours that occurred during a predetermined period of time. The utility will then determine each customer’s specific load during that time and the customer’s peak load capacity will be determined.

How do you lower your capacity tag?

If your business can effectively predict the potential peak day(s), you can temporarily reduce your electricity usage to lower your capacity tag for the following year. A capacity tag reduction will help mitigate the increase in capacity costs going forward, and likely generate additional savings. 

The bottom line is that it pays to understand the importance of capacity and the steps your business can take to affect your tag to better manage your costs. Capacity is just one of several cost components to be aware of with electricity pricing.

Learn more about commercial electricity strategies