New Jersey

As small businesses shop for a third-party supplier, they should compare two separate charges: one for the amount of energy they consume and another for demand. Most of us think of electric bills in terms of the total amount of electricity used. The more power we use in a month, the more we expect to pay. The less we use, the less we expect to pay. But, unlike residential customers, most businesses pay for more than just the amount of kilowatt-hours (kwh) they consume. Most businesses also pay for demand. Demand is measured in kilowatts (kw) and is the rate at which electricity is delivered at a given instant or averaged over some period of time.

For example, suppose you turn on ten, 100-watt bulbs. They "demand" a total of one kilowatt (10 bulbs times 100 watts = 1,000 watts = one kilowatt). Fifteen minutes later they have used one-fourth of a kilowatt-hour (one kilowatt times one-quarter of an hour). However, their demand remains one kilowatt. If the lights stay on for one hour, the consumption would be one kilowatt-hour. But, the demand still would be one kilowatt.

If everyone used a steady flow of electricity throughout the day, every day of the year, there would be fewer challenges for the generation supplier, but this isn't the case. Electricity use rises and falls throughout the day.

For example, two customers each use 1,200 kilowatt-hours in a day. One has a steady demand of 50 kilowatts (50 kilowatts x 24 hours = 1,200 kilowatt-hours). The supplier needs 50 kilowatts of generating capacity to serve the customer.

The second customer has a demand of 30 kilowatts for 23 hours and 510 kilowatts for one hour. Total electricity used is 1,200 kilowatt-hours (30 kilowatts x 23 hours + 510 kilowatts x 1 hour = 1,200 kilowatt-hours). However, now the supplier must have 510 kilowatts of generating capacity standing by to serve this customer.

Demand charges assign to each customer the cost of the power supplies needed to satisfy the maximum demand of that customer. In choosing a third-party supplier, a business should compare demand charges and kilowatt-hour charges, and must consider what the total electric bill will be. A total bill includes charges for both kilowatt-hours and for kilowatt demand.

Business customers shopping for a third-party supplier should check for pricing options based on the time when they actually use electricity. These options offer opportunities for lower electricity prices during certain hours of the day, days of the week or even seasons of the year.

Before choosing a third-party supplier, learn about your present electricity usage pattern by reviewing historical usage information for your business. The information is available from your local distribution company, which might refer to it as a load profile.

A business may significantly reduce its electric generation costs by rescheduling its usage. For example, a factory that can schedule production runs during the night might pay less for electricity during that time. Or, a water authority could run its electric pumps to fill large storage tanks at night and pay less for the electricity used to run the pumps.

Here are some examples of pricing that is tied to when electricity is used. Before deciding on a third-party supplier, you should weigh all the needs of your business and all available supplier options.

Time-of-use rates and metering. The cost of producing electricity varies throughout the day. Time-of-use rates and metering connect the amount of electricity used with the time it was used. Like long distance telephone calls, prices are higher during some periods of the day than others. Customers with this type of pricing plan can save money by moving their greatest electricity usage to periods when the prices are lowest.

Real-time pricing. At the end of a business day, customers with the real-time pricing option are quoted actual prices for electricity for each hour of the next business day. Special meters record electricity usage for each hour. The amount billed is based on the price set for each hour. Customers truly pay a commodity price based on actual costs, not a rate based on average costs. Customers can reduce their electricity costs by adjusting their usage to the most favorable hours of the day based on the actual prices they'll be charged.

Discounts for curtailing electricity usage. During periods of high demand for electricity, such as during a heat wave, power suppliers may face difficulty keeping up with demand. Also, the prices they would have to pay for additional electricity to serve their customers would be extremely high. As a result, suppliers may offer special credits to customers who, when asked, agree to reduce usage by a predetermined amount. For example, a large industrial facility could receive a credit on its electricity bill for cutting back its usage during a heat wave. Or, a hospital could receive a credit on its bill for running its emergency generators to reduce the demand on its supplier for electricity.