Behind the Curtain
TCAPs Frequently Asked Questions
WHEN IS 2¢ REALLY 2¢?
TCAP recently checked up on 10 former member cities who left for “better deals” last year. Surprise! We learned that, in total, they spent $1.2 million more in year one than they would have had they stayed!
Please don’t make the same mistake they did. TCAP has exciting plans for a smart, innovative new approach to future energy procurements. Call today, and we’ll come in person to explain how TCAP will be able to keep savings coming for you well into the future.
Price adders and how contract language can cost you money
|Bandwidth||Bandwidth is a range of electricity usage. Usage outside of that range may result in imposition of a market price instead of a contract price Bandwidths vary and the price is usually higher for wider bandwidths.||Some contracts impose bandwidth on a total usage basis or in other instances on an ESID basis. Some contracts allow the Seller the right to decide if they want to impose bandwidth provisions or not. This is essentially a ratchet up provision.||TCAP has bandwidths in our contract, but it is only imposed on a total zonal TCAP load basis. Thus, one member’s changing load usage will serve to offset another member’s usage. TCAP has never had a bandwidth penalty imposed.|
|Adds/Deletes||Contracts can vary widely on how adding new accounts or deleting existing accounts are handled.||Some contracts may place limits on adding or deleting accounts. New accounts may have to be added at a higher cost. Deleting accounts may result in additional costs or considered a partial termination.||TCAP has unlimited adds and deletes for member accounts except for new accounts whose peak demand is over 1,000 kW which are priced at a market based price. New ESIDs between 250 kW and 1,000 kW peak load can be on contract rate or the market based rate.|
|Congestion Costs||Congestion costs are the costs incurred to relieve congestion on the ERCOT transmission grid. Congestion costs vary by zone and can be significant at times. Some energy prices include congestion costs and some prices do not. Congestion costs are market price based and cannot be known with certainty for future periods at the time. “Fixing” these costs is similar to buying price insurance. And sometimes the cost of this “insurance” can be much higher than the actual cost of congestion that is actually incurs.||Congestion costs are treated many different ways in retail supply contracts. Some parties include it in the energy price and others treat it as an adder to the energy price at cost or cost plus a mark-up. Some contracts may define congestion costs differently than stated here. These contacts may state that “congestion costs” are included in the quoted price, but then later state the difference between the zonal load zone price and the zonal hub price is not included and will be treated as an adder to the energy price.||TCAP approaches congestion costs in a unique manner. The TCAP contract price includes the costs of congestion by zone, based on historic prices. However, the TCAP contract allows for a true-up of congestion costs at the end of each quarter. If actual congestion costs are less than the amount included in the contract, TCAP is refunded the difference. If the actual costs are higher, TCAP is responsible for the additional costs. TCAP maintains a reserve account to cover shortfalls, should they occur. If the reserve account is too small, TCAP may be required to create a small surcharge to replenish the reserve account. If the reserve account is too large, TCAP refunds the overage to members,|
|Ancillary Services Costs||Ancillary Services are various costs incurred by ERCOT to maintain system reliability. Much like congestion costs ancillary services, these costs change hourly and are not known with certainty for future periods. Ancillary Services costs are typically included in the energy price quoted by a seller. But since the actual costs are unknown at contracting, this is similar to buying “price insurance” and can be much higher than the actual costs of ancillary services.||Ancillary services in most retail supply contracts are included in the energy price and “fixed”. There are instances where a seller may be able to adjust the energy price upward if their costs are higher than anticipated in the original contract. See Change of Law section below.||The TCAP energy price includes the costs of ancillary services based on historic prices incurred and anticipated future changes. However, the price is trued up to actual costs incurred on a quarterly basis and refund amounts are issued to TCAP or TCAP may need to make an additional payment to cover shortfalls. TCAP maintains a reserve account to cover any shortfalls and refunds dollars should it exceed ongoing maintenance levels. Since 2011 TCAP has refunded over $11 million dollars to members from this account.|
|Change in Law / Material Changes||A Change in Law, or Material Changes provision in a contract will allow typically the Seller, to adjust the price or other provisions should the Seller find its costs for items it does not control, such as congestion costs and ancillary services costs change due to changes in market rules, laws or regulations. Typically, this means the costs have become greater than that being incurred when the contract was executed. This clause is important because even though a contract may state the energy price is fixed for a period of time this provision can allow the Seller to increase price without any action or agreement of the Buyer.||Most, if not all, retail supply contracts include some form of material changes provision or change in law provision. Typical language creates a unilateral right to the seller to adjust the price if some action by ERCOT, the Texas PUC, the Texas legislature or other governmental or quasi-governmental authority causes the Seller’s underlying costs to increase. TCAP has seen few instances where this clause is initiated by a decrease in costs. Sometimes the Buyer may have the right to reject the price increase, but this will often trigger an early termination or default under the contract and subject the Buyer to an accelerated payment of early termination or default damages.||TCAP’s contract also has a materials changes clause, but the unique approach TCAP takes for some uncertain costs, such as ancillary services and congestion costs limits the potential application of material changes clause. TCAP also recognizes that actions that may trigger a change in costs to a supplier may decrease the costs instead of increasing the costs. The TCAP approach to some of these costs allows the Buyer to realize the benefits of any decreases in these costs over time too. In addition, the TCAP material changes clause also directs the Seller of wholesale supplies to pass through any refunds ordered by the appropriate regulatory or legislative bodies and received by the Seller that are related to serving end use load.|
|Credit||Since many energy contracts can be for providing energy at a fixed price for years into the future, the creditworthiness of both parties is essential to provide a level of assurance of specific performance to contract terms.||Many energy contracts impose certain creditworthiness checks and measures on the Buyer. These may include provision of financial information and a requirement to provide financial assurance at contract start, or if Buyer’s credit degrades during contract, if requested by Seller.||TCAP understands that most forward contracts involving fixed prices imposes performance obligations on both parties. The TCAP wholesale supply contract has credit checks and assurances imposed on both parties to ensure that both parties maintain the financial ability to meet the terms and conditions of the contract.|
|Default/Early Termination||Since most fixed price contracts require commitments, there is the need to protect each party from non-performance or default by the other. Typically, these damages are calculated on a “marked to market” basis with liquidated damages provisions. Payment of damages is based on the difference between the contract price and the current market price applied to anticipated usage for the remaining term of the contract. . If the market price is lower than the contract price, the difference is paid by the Buyer. If the contract price is lower than the market price, the Seller pays.||Default language can vary greatly by contract, but TCAP has seen language where the only expressed damage payments are by the buyer to the seller.||TCAP’s wholesale supply contract includes a balanced damages provision in which the “out of the money” party makes payment to the “in the money” party in the event of a default. This prevents either party from having an incentive to default under a contract simply because they do not like the price or terms of the contract at a particular time.|
|Energy Cost Adders||When evaluating supply offers it is important to recognize that there is little commonality in pricing between companies. There are a variety of various charges that a provider can include or exclude in their energy price. It is important that the Buyer be fully aware these and how they are determined. This requires a fair amount of research if a true apples-to-apples comparison between contract prices is going to be made.||TCAP has seen contracts that are very upfront about what is included and excluded in an energy price and what additional charges may be imposed.
TCAP has also seen instances where these charges are almost hidden in the contract. For this reason, it is very important that a deliberative review of not only the terms, price and conditions, but the actual contract that will be used. If a buyer is uncertain, they should seek an explanation. If additional charges or price adders are included in the offer price, review the history of what these charges have been.
|The TCAP contract is very clear what the charges are under the agreement as well as which charges are fixed and which may be subject to adjustment. TCAP thoroughly reviews a potential vendor’s contract prior to soliciting bids and negotiates changes in provisions that TCAP feels are either not in the interests of our members or unfairly balanced towards one party or the other. TCAP seeks an agreement that is fair to both parties and offers the best combination of price, service, stability, and flexibility to best serve its member’s needs.|
|Partial Terminations||Partial termination is a contract provision that TCAP has seen in various forms from time to time in retail energy supply contracts. Essentially, it treats ESIDs that are no longer using energy or owned by the Buyer as a terminated ESID and calculates a payment from Buyer to Seller based on the remaining lost sales from that facility.||This provision often fails to recognize that termination of service at one location is often offset by new or increased service at another location. For example, Cities sometimes close one facility, because they built a new facility to replace it. This may not be recognized under a strictly enforced partial termination provision. It may be that a City may be required to pay a partial termination payment for the old facility and have to bring on the new facility at a new higher market price.||TCAP’s contract does not have a partial termination provision. With unlimited adds and deletes and with the contract treating all members’ loads within a zone, there is little problem with adds and deletes that offset each other regarding energy usage.|
|Broker Fees / Aggregation Fees||Brokers are parties that will solicit and present energy price offers from various market providers to a buyer. The broker might only present prices from partnered suppliers excluding some potentially favorable contracts and bids and may or may not provide a detailed analysis of these bids or contracts to ensure a true apples-to-apples comparison. A broker also may not attempt to identify and negotiate more favorable terms for the end user.||Brokers are typically paid via usage based fees to secure offers for electric service. Brokers may provide other services to Buyers, but that may be by separate agreement and at a separate cost. Broker fees are often embedded in the energy price paid by buyers to sellers and the amount of the broker fee is often not disclosed to the buyer. Many brokers use the term aggregation in their name, but they rarely, if ever, truly aggregate various buyers under a single contract.||TCAP Aggregation fees are fees paid to TCAP by its members to support both procurement as well as other energy services for members. These services include free access to a variety of consultants, attorneys and market experts to help a member with all of the energy related questions and problems. TCAP’s aggregation fee is not only fully disclosed to members, it is included as a separate line item on the member bill. TCAP’s research shows that TCAP’s Aggregation Fee is typically smaller than most Broker Fees and provide a wealth of additional services for its members.|
IS THE SKY REALLY FALLING ON THE MARKET?
If you’re being warned to lock in electric rates long-term now while they’re low—don’t bite. Since 2010 the cost of wind-generated power has dropped 23%, solar by 73% and, since 2014, natural gas prices have fallen 33%. No magic! Technology has simply advanced, and supply has exploded. America is now the largest producer of energy in the world—much of it coming from Texas. Moreover, trends show supply booming with prices unlikely to rise appreciably.
Will prices still fluctuate and sometimes spike? Yes. That’s the nature of a futures-driven market and unexpected events (weather, catastrophes). For example, we’ve just seen a dramatic dip in generation reserves with the recent retirement of two large Texas coal-fired plants—likely a short-term problem. Just keep in mind that for TCAP members, such events shouldn’t be an issue. Your current energy rate is fixed through 2022 at a very favorable price.
A Quick Look at the Energy Market
What motivates us to buy something? Most of us have fallen victim to the lure of the warehouse stores and bought something like a year’s worth of paper towels because we were captivated by the giant packaging and apparently low price. But once we get home we now have to find a place to store this monstrous amount of paper towels. We soon learn that if an item is readily available and has a low price there is little need to “stock up” now and deal with a massive amount of inventory. But this approach to buying rarely results in an optimal purchasing strategy. Indeed, bulk purchasing adds inventory risks and carrying costs and precludes the opportunity to take advantage of opportunities should market changes or sales discounts result in future prices being lower than your inventory price. It is really not much different for electric energy.
TCAP members constantly report of calls from Retail Electric Providers (REPs) and brokers encouraging them to sign long term contracts NOW, before prices go up in the future. Inducing a need is a classic sales strategy but let’s take a closer look to see if a long-term contract at today’s prices is indeed your best and safest choice.
Much of the recent buzz about long term, low price contracts is centered around renewable energy, particularly solar. Due in part to government subsidies, current future offerings are now lower than similar offerings just a short time ago. Those deal from the not too distant past also looked very attractive at the time when compared with past deals. And so it goes. Solar energy has been improving in price due to technology driven improvements. Much like computers and cell phones, it is probably not a stretch to think this will continue into the future.
The downward trend in pricing for renewables have some utilities that invested heavily a very few years ago in “cheap” renewable energy now finding their contracts are “out of the market” and they are paying more than the current market price putting them at a competitive price disadvantage. Some recent stories in Texas point out the consequences of securing all your power via renewable resources at one time, while technology continues to drive down pricing.
TCAP thinks it is best to study energy markets and look for the best opportunities to buy that maintain flexibility to take advantage of future market opportunities. Technology improvements will spur those future opportunities if we have a fundamentally sound energy future. Let’s take a quick look at how our energy future looks.
America has enjoyed low stable prices for oil and natural gas for a good while. The United States has been the world’s largest producer of oil and gas for the past couple of years and there is little sign of that changing soon. Indeed, a chart in the latest edition of the Department of Energy’s Annual Energy Outlook predicts continued high supplies of natural gas and oil from U.S. fields out through the entire length of their forecast period (2050).
Texas has been a large participant in this energy supply bonanza. In addition, with so much of Texas electric energy production being fueled by natural gas plants and federally subsidized wind and solar assets, our electricity prices here in Texas have also been low.
One side effect of these low natural gas prices is that coal plants have often become non-economic for energy production. This has happened here, resulting in a number of coal plants shutting down over the past couple of years. This has created some short-term market instability, with high spot prices during peak usage periods. For TCAP members this is not a problem as our current contract rate is set until 2023. Additionally, ERCOT’s estimates of the future Texas market show new generation assets moving in to replace these lost coal generators in the next couple of years. This should help future market stability and restore peak usage pricing to levels more like those experienced prior to these plant retirements.
So while today’s current short term price spikes do create some spot market uncertainty, it should be a short term phenomenon. TCAP does not think this is the time to fall victim to panic buying, especially when it involves long term contracting to avoid what are anticipated to be short term market disruptions.
The energy future looks bright for both the United States and Texas. This includes oil, gas, and yes, even electricity. While Texas may see some price volatility that may increase electricity pricing in the short term, the longer-term outlook remains positive for low priced energy. TCAP also new opportunities for improving offers are emerging for those willing to think a bit outside the box when it comes to procurement approaches.
SO, WHOM SHOULD YOU TRUST?
Should you trust the for-profit sales reps who see your city as one more cash cow they can keep milking, or trust TCAP’s fifteen-member board of your peers—City Managers, Finance Directors, City Attorneys, and Council Members who volunteer their time to look out for you?
IS AGGREGATION OUTDATED?
Many of our competitors are convincing cities that aggregation is outdated. They’ll point out that the market has matured and become more efficient. Yet, while the market may have changed, what hasn’t is that when political subdivisions aggregate, they get better contracts, more flexibility, and prices they simply cannot obtain on their own. Also, contract terms are about more than price alone. They need to allow you to grow and add accounts while making sure your interests are protected. TCAP always establishes the best contract terms before bidding on price so our members don’t get mired in a morass of industry language they don’t understand. What’s in our competitor’s fine print may not meet the unique needs of your city or special district.
DON’T BIDS GET ME THE LOWEST PRICE?
What you may not know is that purchasing electricity DOES NOT require an RFP. The Local Government Code; Title 8, Sec. 252.022 (15) states that electricity is exempted. We’ve seen too many cities go through the RFP process, then end up paying more than they should to the “lowest bidder.”
WHAT ARE VIRTUAL PURCHASE POWER AGREEMENTS (VPPAs)?
Most end users, who traditionally buy in the retail market from REPs have probably never heard of VPPAs and that is not surprising. In reality, they are typically wholesale market contracts and are actually quite common in the ERCOT wholesale market. They have also been called “Contracts for Differences” at other times. Some parties have stated that VPPAs are not physical contracts, but financial ones. This is true in a sense, but not necessarily true in another. While they do focus on payments, they are typically used to fix prices for physical energy transfers. In a broad sense they allow a energy seller the option to sell firm power to a buyer even when their particular generation station may not be running, or is un-economic to run.
ERCOT rules and models establish what every generator will be paid for the energy the put into the ERCOT grid. On the other side of the transaction, ERCOT also establishes what every end user will pay for the energy they take off the grid to serve their meters. Problem is, these prices are spot market based and change every fifteen minutes. A contract for differences, or VPPA allow a willing seller and buyer to agree to sell and purchase power at a fixed price. This creates price certainty and removes the spot market price risk from both parties.
When a REP sells you power at a fixed price, he probably has a VPPA with a generator or power marketer to buy power at a similar, but lower, fixed price.
If a end user wishes to buy into a wholesale renewable contract they will probably do so at a fixed price and thus be signing a VPPA. The end user now has the responsibility of getting that power from the plant or market trading hub that he purchased the power at, to their end use meters. Since all competitive area end users have to buy through a REP, this will require some coordination and agreement with their existing REP to incorporate this power into the portfolio of energy the REP already is selling the end user.
In addition, there are a number of addition cost items that ERCOT will impose on the buyer to get this energy delivered to a retail meter. The REP may add some additional costs too. These cost adders are outlined in the TCAP brief titled “When Two Cent Energy is Not Two Cents”.
A simple example of how financial transactions under a VPPA work in the ERCOT market to bring revenue and cost certainty to sellers and buyers is shown below. In addition, TCAP is always willing to come to your office to explain these market transactions in further detail.
|Seller’s Renewable Plant||Buyer’s Delivery Point|
|Market Price||$0.02/kWh paid to Seller by Market||$0.02/kWh paid by Buyer to Market|
|Difference||$0.01/kWh paid by Buyer to Seller||$0.01/kWh paid by Buyer to Seller|
WHEN IS TRUTH SOMETHING ELSE?
We’ve seen an endless stream of retail electric salespeople knocking at your door and promoting their for-profit companies at council meetings. We’ve been shocked at just how low our for-profit competitors will go to steal business from us. From partial truths to omissions, to outright lies smearing TCAP—they’ve used every trick in the book.
TCAP, as a unique political subdivision, gets to buy the same wholesale electricity from the generator that our competitors do. So, how can they make it seem like they charge less, and we charge more?
And how can some claim to offer you 100% renewable energy when, in fact, the sun doesn’t shine, or the wind blow 24x7x365? But like a skilled magician, some sales reps will employ misdirection to make it seem otherwise. “Don’t look away from that 2¢ rate!” Ignore the broker fee, the cost of getting electricity to your meter, congestion charges, and the gotchas hidden in the contract fine print (“adder” fees and meter charges). Kind of sounds like the Wizard of OZ: “Ignore the man behind the curtain!”
WHAT’S BEHIND THE CURTAIN?
|Why 2¢ Isn’t Really 2¢||Price||Behind the Curtain Adders|
|ACTUAL RATE (wholesale Solar from generator)||2.5¢||Added to the 2.5¢|
|Ancillary Services||.25¢||Added to the 2.5¢|
|Zonal Basis||.45¢||Added to the 2.5¢|
|Line Losses @ 6.5%||.16¢||Added to the 2.5¢|
|REP Adder Fees||.15¢||Added to the 2.5¢|
|Broker Fee (if broker involved)||.20¢||Added to the 2.5¢|
|ACTUAL ALL–IN RATE||3.7¢||Difference = 1.2¢|