Default Generation Service Continues to Offer Value
Electric customers with generation contracts that are nearing their expiration date may want to consider a non-retail alternative to purchasing power for the next 12 months. This alternative, called the “Standard Service Offer” (SSO), is the default generation service which investor-owned utilities are required to offer to customers that do not secure generation service from a retail supplier.
Historically, the SSO has resulted in higher costs for customers relative to the retail market. That changed beginning in late Summer 2021 when power prices started sharply increasing in response to natural gas shortages overseas, supply chain disruptions, widespread inflation, and international turmoil. In contrast, SSO rates have remained relatively low. This is because the auctions used by the utilities to secure SSO load were held prior to the run-up in the market. The result is that most customers on the SSO are now paying less for electric generation than customers that are purchasing power on the retail market.
In a recent interview with Crain’s Cleveland Business, Matt Brakey, President of Brakey Energy, had the following to say about the situation: “Customers that now choose not to enter into power contracts are better positioned than those trying to proactively enter into supplier agreements…. The smallest, least sophisticated customers tend to be on the SSO in most years, and we're seeing this flip where now the most sophisticated customers are going to the SSO because of the value it now represents, just because of the strange quirks that led to power prices going up."
As discussed in the Electric Market Update below, the forward market is projecting extremely high power prices for the next 12 months. SSO rates are also slated to increase during this time. However, due to the timing of the auctions that were used to secure load for the June 1, 2022 through May 31, 2023 delivery year, it is very likely that SSO prices for both American Electric Power (AEP) and FirstEnergy (FE) territory will remain well below market prices through May of next year.
Based on current market prices and the relative value that the SSO offers in comparison, Brakey Energy is recommending that customers with upcoming expirations consider defaulting to the SSO. If you would like some assistance in determining if this strategy is right for you, please contact Matt Brakey.
Transmission Costs Decreasing for AES-Ohio Customers
Transmission costs for customers of AES-Ohio, formerly Dayton Power & Light, will decrease on June 1, 2022 in response to AES-Ohio’s updated Transmission Cost Recovery Rider- Nonbypassable (TCRR-N) rates. Decreases are primarily the result of AES-Ohio’s remedy of the under-collection balance that was prominent in the 2021 TCRR-N filing.
The table below shows the current and June 1, 2022 TCRR-N rates for customers of AES-Ohio. The TCRR-N has both kilowatt-hour (kWh) consumption and kilowatt (kW) demand components.
Table 1: Current and June 1, 2022 TCRR-N Rates for AES-Ohio Customers
Customers that are participating in AES-Ohio’s transmission pilot program are opted out of paying the TCRR-N rider. If you have any questions about this pilot program or how the new TCRR-N rates will impact your electric costs, please contact Jennifer Lemley.
The highly competitive generation offers we highlighted in the past for residential customers have long disappeared. We are now recommending customers with expiring contracts default to the SSO until further notice. This rate varies by electric distribution utility but is likely below current market conditions. To the extent you are in expiring contract, make sure you provide notice to your supplier that you would like to default back to the SSO as to avoid being swept up in extremely costly holdover provisions.
Brakey Energy has long and often found defaulting to distribution utilities’ Standard Choice Offer (SCO) a prudent strategy for natural gas supply. We encourage our readers to employ this strategy if they’re comfortable riding the highly volatile natural gas market. Despite the runup in natural gas prices, we’re seeing the SCO produce better pricing than many other competitive offers.
Natural Gas Market Update
The NYMEX price for April settled at $5.336 per Million British Thermal Units (MMBtu) on March 29, 2022. This price is up 16.8% from March’s price of $4.568 per MMBtu. This settlement price is used to calculate April gas supply costs for customers that contract for a NYMEX-based index gas product.
The graph below shows the year-over-year monthly NYMEX settlement prices for 2018, 2019, 2020, 2021, and 2022 to-date. Prices shown are in dollars per MMBtu of natural gas. Natural gas prices have increased since last month in response to higher-than-normal domestic demand, record level liquified natural gas exports, and storage levels below the 5-year average.
Figure 1: NYMEX Monthly Natural Gas Settlement Prices
Electricity Market Update
The graph below shows the Around-the-Clock (ATC) 12-month price strip for electric generation and how it has changed over the past 36 months for three Ohio utility service territories: AEP, FE (the ATSI zone), and AES-Ohio (the DAY zone). Prices have increased substantially since March in response to record-level exports of liquified natural gas, following Russia’s invasion of Ukraine.
Figure 2: 12-Month Energy Price Strip
*ATC pricing as of April 26, 2022. Data provided by Direct Energy Business.
The graph below provided by Direct Energy Business shows the April 26, 2020 through April 26, 2022 ATC forward prices for calendar years 2023, 2024, 2025, 2026, and 2027 for the AD hub. The forward price for calendar year 2023 is continuing to trade at an extreme premium relative to outlier years.
Figure 3: AD Hub Calendar Year Strip Prices
*ATC pricing as of April 26, 2022.