Confronting
Electricity Costs
in the United States
As consumption patterns change and prices rise,
electricity bills are skyrocketing. Several moves
can tilt the balance of power and help a company
control costs.
Confronting Electricity Costs in the United States
1
As technological transformations and shifting energy sources continue to be the engines for
economic growth, America’s previously biggest electricity consumers are being overtaken.
Today’s major wireless providers spend hundreds of millions of dollars on power annually
sending signals to the nation’s mobile devices, while the IT revolution is pointing to Google and
Facebook as two of tomorrow’s largest power consumers. Manufacturing is changing as more
processes become further automated and add greater value.
While these rapid developments in usage trends have caught many off guard as they grapple to
control rising energy costs, players that capitalize on the formidable complexity of the
electricity value chain can capture sizable savings.
Consider the Power Profile
Before diving into new energy strategies, take a look at your power profile. For example,
geography and consumption will affect strategy choice. Players with a national footprint will
need state-by-state strategies, often encompassing both regulated and deregulated markets.
While users typically have less freedom to influence prices in regulated states, such as Florida,
Georgia, and Washington, hidden opportunities do exist. In deregulated states, such as New
York, Illinois, and Texas, the generation portion of power costs (typically about 50 to 70 percent
of the total) is set by the free market.1 Customers have several choices: Use utility companies for
fixed “tariff” rates; look to third-party suppliers to establish a more competitive fixed rate; or buy
directly off the market index in real time. Be aware that deregulation does not necessarily mean
lower pricing. Open markets tend to produce both winners and losers, and volatility drives
complexity. Understanding your consumption profile and how it relates to complicated market
dynamics is crucial.
Developments in usage trends have caught
many off guard but players that capitalize
on the complexity of the electricity value
chain can capture sizable savings.
Next, consider the load curve. Few markets are as volatile as the electricity grid. On a typical
day, generation costs in a deregulated market could vary between 1 to 4¢ per kilowatt hour
(kWh) in the wee hours of the morning to 6 to 8¢ at peak usage time (see figure 1 on page 2).
Renewable energy subsidies, which often provide a fixed price adder per kWh generated, can
have the somewhat aberrant effect of driving generation prices to zero or even negative
(consumers receive money to take electricity). At the other end of the spectrum, during summer
peaks in some regions without excess capacity, electricity can top 50¢ per kWh.
Many companies have electricity needs that drive market trends. For example, retail stores or
restaurants often have high demand during the hottest, busiest times of the day, while a wireless
network might maintain a relatively flat 24-hour load (see figure 2 on page 2). In theory, these
On average, there are major variations in generation’s portion of the price depending on the source, region, user type, and time
of purchase.
1
Confronting Electricity Costs in the United States
1
Figure 1
Electricity prices fluctuate depending on the time of day
Example
Hourly prices for power generation
(¢ per kilowatt hour)
8
7
6
5
4
3
2
Winter
Summer
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Time of day (24-hour time)
Sources: PJM; A.T. Kearney analysis
Figure 2
The consumption patterns of the various users are strikingly different
Electricity consumption by U.S. customer type
(billion kilowatt hours)
160
Industrial
150
Residential
140
Commercial
130
120
110
100
90
80
70
60
January
2010
July
2010
January
2011
July
2011
January
2012
July
2012
January
2013
Source: A.T. Kearney analysis
Confronting Electricity Costs in the United States
2
daily—and, to a lesser extent, seasonal—load variations should dictate what prices a company
pays. Unfortunately, many procurement departments and energy managers underestimate the
market effect.
Strategies in three areas—energy efficiency, sourcing, and capital projects—can help reduce
electricity spending.
Energy Efficiency
Often overlooked or underappreciated, conservation efforts can create the most substantial
cost reductions. Many companies do not take a calculated and objective approach to
addressing the number of kilowatt hours absorbed by their operations and are missing out on
big opportunities to lower costs. Energy efficiency technology and approaches continue to
evolve even though many of the enhancements such as improved automation, lighting, HVAC,
and refrigeration may require upfront investment and the business case might struggle to meet
the corporate internal hurdle rate. Employing third-party energy managers with a touch of basic
financial engineering can work to turn a capital-burdened project into a contracted, reduced
operating cost.
Many companies do not take a calculated
and objective approach to addressing the
number of kilowatt hours absorbed by
their operations.
With the U.S. energy policy push for both economic and environmental efficiency, utilities are
incorporating more and more dynamic energy pricing. With cheaper and more widespread
deployment of smart meter technology, utilities often will charge different rates based on the
variation of consumers’ usage throughout the day with time-of-use pricing—a major advantage
for those with relatively flat or non-peak demand. In this situation, companies should look to
“load shift”—that is, to move their consumption away from peak price times. For example,
factories, which use the most electricity when machines are turned on, can create significant
savings by taking operation away from peak grid hours.
Some utilities will also pay energy users to decrease consumption with demand response.
During power shortages, companies commit to reducing energy by an agreed amount for a
certain time and, as a result, receive a substantial credit, either immediately or against the
monthly bill. The effect of demand response is especially pronounced during the summer. For
example, on August 2, 2012, the regional transmission organization PJM reported $230 million in
savings to customers from demand response. These voluntary curtailments reduced wholesale
energy prices by more than $3 per kWh during the highest usage hours. While for many users
power shortages will never occur, for some they are relatively frequent.
Further drawbacks must also be considered. Depending on the sophistication of its energy
management group, a company may require a third-party energy manager to support demand
response contracting because the details can be complicated and a misstep could be
Confronting Electricity Costs in the United States
3
disastrous for operations. A probability study based on historic data will be required, to understand the commitment and the associated operational risks of partnering with a utility. And, of
course, a company pursuing discounts from demand response will need the ability to make do
with off-the-grid sources, including self-generation. For example, in wired telecommunications,
much of the network has reliable backup generation, so demand response is widely used to
save on power bills. Wireless players, however, are reluctant to rely on the batteries in their
towers during peak periods.
Sourcing
Regulated sourcing opportunities
Utilities’ rate structures often incorporate load patterns, aggregate usage, site usage, and
geographic footprint into a complex variety of rate offerings. The challenge for large consumers,
especially those with an atypical consumption profile, is to determine which rate is most
beneficial. How much due diligence has the company done around this? Performing full-scale
invoice and rate audits will help ensure regulated market procurement is as effective as
possible. Determining the most attractive rate available will often require detailed analyses of
consumption patterns combined with a thorough understanding of local rate structures and
regulations—a potentially daunting level of detail, especially when the footprint is widespread.
Using a qualified third-party auditor to support the task may be the only realistic way to go; the
best partners will have a detailed nationwide rate-structure database that can be used for
comparative purposes.
We recommend that once consumers
understand their consumption, they enter
the open market and look to suppliers
that buy, sell, and trade generation.
Deregulated sourcing opportunities
Most consumers want to avoid the inherent risks and complications involved in strategically
procuring electricity in deregulated markets, so they acquire it directly through a utility. This
“standard” generation rate is likely the highest rate. It is analogous to paying the “rack rate”
displayed on the back of a hotel-room door: very high, but at least it is fixed.
We recommend that once consumers understand their consumption, they enter the open
market—looking to energy suppliers that buy, sell, and trade generation to purchase a relatively
fixed consumption. This is done through a closed request for proposal tenders or open online
auctions—closed tenders are more likely to provoke aggressive bidding than a reverse auction,
which forces suppliers to reveal their bidding hand. The next step is to look at the problem a
little more closely: Given its consumption profile, how can a company optimize its procurement
strategy with inherent regional, seasonal, and daily volatility in electricity prices?
Confronting Electricity Costs in the United States
4
Suppliers like to provide fixed rates for a given usage for one-year periods or longer, and
companies often like that certainty. However, if the company has a constant load, why should it
pay a supplier a constant rate that is substantially above the daily average, and why does the
supplier charge such a premium (see figure 3)? The answer is risk. The supplier wants to ensure
it receives a premium rate to offset when it has to supply electrons cheaply while paying a
fortune for generation at peak hours and seasons. Again, it comes back to how well a company
knows its consumption. The shrewdest players are already prepared to negotiate for fixed rates
and know if and when to take the next step—choosing to ride the index. Rather than paying a
fixed rate for a given amount of consumption, the company contracts the supplier to simply
deliver power at market rates (with a small adder fee).
Figure 3
Fixed energy rates provide certainty but may be high
Illustrative
Average price of generation
(¢ per kilowatt hour)
8
Tariff rate
7
Client’s fixed rate
6
Index price
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Time of day (24-hour time)
Source: A.T. Kearney analysis
Remember these energy suppliers are often the same firms that sell consumption at fixed rates,
though with this ride-the-index approach, they are passing the risk premium back to the
company in the form of savings. Our research and work with clients shows there can be major
advantages depending on consumption patterns. In fact, the savings can be substantial—up to
40 to 60 percent of generation costs, often with a very acceptable level of risk.
The devil, of course, is in the details, and the right procurement solution and risk level will vary
across consumer profiles (see sidebar: Cutting Costs with Tailored Procurement Strategies on
page 6). Those with peak consumption from 4:00 p.m. to 6:00 p.m., when the market reaches
its highest, may be well served with a constant rate agreement to minimize the effect of spikes,
if the supplier has not baked in an extensive risk premium.
Confronting Electricity Costs in the United States
5
Cutting Costs with Tailored Procurement Strategies
A wireless provider with
thousands of cell towers across
the United States had hourly and
seasonal loads that were
generally flat. Spending in large
states topped $5 million per year.
We suggested a procurement
strategy with three tactics: In
regulated markets, negotiate at
the state or regional level based
on a rate audit. In deregulated
markets, “ride the index.” Where
regulated utilities offer time-ofuse rates, install smart meters.
Projected savings for regulated
markets is 3 to 6 percent; in
deregulated markets, savings
could reach 30 to 40 percent
on generation.
For a financial institution,
self-generation was the best
strategy. The firm had one central
data server in a deregulated state,
a flat load with some spikes, and
high annual usage of more than
$10 million.
Investing in self-generation with
low-cost natural gas could
minimize transmission and
distribution based on a detailed
understanding of the hourly and
seasonal consumption profile.
Projected savings on generation
could potentially reach 45
percent.
Capital Projects
As the manufacturing landscape alters, more major capital projects are incorporating utilities
costs into the decision-making process. Once reserved for the high-consuming process-based
industries—chemical, steel, and pulp and paper—the energy bill is now of growing importance
for technology companies and their power-hungry servers.
One approach is to participate far upstream in the value chain with self-generation. The savings
impact can be more pronounced for self-generation, which includes the option of selling
surplus power to the grid. But one question to ask is whether companies today are willing to
spend capital to generate energy. Our experience shows they are not. They want to cut costs,
but—just as with investments in efficiency—many are reluctant to dedicate capital. Again, this
is where partnering with a third-party energy project developer can help in getting over the
capital hump. A further advantage could make it worthwhile to invest in generation assets: It
can be a profitable move for consumer product, retail, and other customer-facing firms that
want to appear “greener” to discerning shoppers.2
Once reserved for the high-consuming
process-based industries, the energy bill
is now of growing importance for
technology companies.
Another area to consider is the company’s appetite for financial risk. Budgets are subject
to very different types of pressures depending on the nature of the business and its management strategy. Does the company require certainty in electricity costs, confining it to deliver
within budget every month, or is it free to take a more aggressive, but riskier, approach to
For more about green energy development, see The Profitable Shift to Green Energy at www.atkearney.com.
2
Confronting Electricity Costs in the United States
6
reducing costs? The appetite for risk will, of course, have a big impact on the procurement
strategy, especially in deregulated markets where searching for real-time price savings comes
with strong volatility.
Operational risks should also be taken into account. For example, if demand response is
contracted to lower costs, what is the likelihood that this procurement solution will result in the
lights going out? If this occurs, what is the impact on revenue-generating operations?
Generating Margin Boost
While electricity costs can seem like an immovable cost of doing business, many companies
have yet to look behind the curtain of supply and demand. Long-term advantage can be found
by first establishing your actual consumption profile and then using that profile to build a
procurement strategy that capitalizes on the volatility and uncertainty of the nation’s electricity
markets to supply your power needs. The process starts with learning—and will likely end with
a non-controversial and substantial boost to margins.
Authors
Patrick Haischer, partner, New York
patrick.haischer@atkearney.com
Peter Findlay, consultant, Toronto
peter.findlay@atkearney.com
Confronting Electricity Costs in the United States
7
A.T. Kearney is a leading global management consulting firm with offices in more
than 40 countries. Since 1926, we have been trusted advisors to the world's foremost
organizations. A.T. Kearney is a partner-owned firm, committed to helping clients
achieve immediate impact and growing advantage on their most mission-critical
issues. For more information, visit www.atkearney.com.
Americas
Atlanta
Bogotá
Calgary
Chicago
Dallas
Detroit
Houston
Mexico City
New York
Palo Alto
San Francisco
São Paulo
Toronto
Washington, D.C.
Asia Pacific
Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
Mumbai
New Delhi
Seoul
Shanghai
Singapore
Sydney
Tokyo
Europe
Amsterdam
Berlin
Brussels
Bucharest
Budapest
Copenhagen
Düsseldorf
Frankfurt
Helsinki
Istanbul
Kiev
Lisbon
Ljubljana
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Stuttgart
Vienna
Warsaw
Zurich
Middle East
and Africa
Abu Dhabi
Dubai
Johannesburg
Manama
Riyadh
For more information, permission to reprint or translate this work, and all other
correspondence, please email: insight@atkearney.com.
The signature of our namesake and founder, Andrew Thomas Kearney, on the cover
of this document represents our pledge to live the values he instilled in our firm and
uphold his commitment to ensuring “essential rightness” in all that we do.
A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea.
A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited,
a company organized under the laws of England and Wales.
© 2014, A.T. Kearney, Inc. All rights reserved.