Market Tips - steps to buying an electricity contract

Market Overview

Electricity prices in New England (the predominant component of electrical supply) are driven by forward prices for natural gas. Prices are established by the last (or marginal) generating unit selected to meet demand for any given hour (the marginal unit). New England has a large fleet of natural gas fired generation that for many hours of the year sets the market clearing price for electricity.

Unlike natural gas or crude oil, it is extremely difficult to track forward electricity prices as there is no index available to the public. TransCanada maintains a Forward Electricity Price Index which allows you to track the history of forward prices to help you to identify trends and the relative direction of forward prices. Otherwise, the next best proxy is to reference NYMEX natural gas futures. The relative trend for natural gas will indicate the relative trend for forward electricity prices. 

New England also has a unique ancillary market that will contribute to your energy quote. The ancillary items of Capacity, Congestion and Daily RMR vary based on your location within New England.

• Connecticut,
• Maine,
• Rhode Island,
• New Hampshire,
• Vermont,
• Northeast Massachusetts (NEMA),
• Southeast Massachusetts (SEMA) and;
• Western and Central Massachusetts (WCMA).

Your specific location will affect the cost and volatility of the ancillary costs.

> Back to Top

Step-by-Step Process

Step 1:
Usage Data
If you are a commercial or industrial business located within New England and looking for a power supply quote, contact TransCanada and describe your consumption levels and location(s). You will need to send a recent utility bill and assist us with obtaining your historical usage. We will analyze your usage patterns and level of usage in order to provide a customized price. Prices will vary depending on your location, your total electricity requirements and your consumption patterns (for example, whether your greatest electricity demand occurs during the peak hours of the week, or if you have significant overnight and weekend demand). Once the analysis is complete, TransCanada will promptly contact you with a price proposal.

> Contact TransCanada

Step 2:
Credit and Contract
Clear credit and contract issues in advance. Read through the contract and make sure you are comfortable with all of the terms and conditions. Make sure your credit has been cleared with TransCanada before you focus on final pricing. Too often prospective customers lose an attractive price offering because contract and credit concerns have not been resolved.

Step 3:
Obtain Prices
Forward market prices for electricity are highly volatile, even within the same day. Therefore when making price comparisons between suppliers, it is important to get quotes at a specific time and on the same day for the same terms. Make sure you are making apples-to-apples comparisons. Be very specific about the product you want suppliers to quote. Request that suppliers are explicit as to what is and is not included in the price.

Establish a baseline price with us, monitor our Forward Electricity Price Index or follow the natural gas futures and periodically check back with us for a price refresh to make sure your adjusted baseline is still on target. Keep in mind that other ancillary market costs will also affect your final price.

Step 4:
Contract Terms and Length
The most difficult part of this process can be deciding when to sign a contract and for what term length. No one has a crystal ball to predict future electricity prices. It depends on your own view of forward prices. If you think prices are only going to rise, sign something long-term (24, 36, 48 months or longer). If you think prices are going to fall, execute a short-term contract (3 or 6 months). If you expect stable prices in the near term, sign-up for one year. Remember that you can sign a contract now for a contract starting at any point in the future. You don’t have to wait until March to sign a contract starting in April. 

You may want to consider a variable price contract (i.e., a contract that settles some or all your of your energy consumption in the hourly market). Consider your and your company’s risk tolerance. Demand for this product is driven by frustration over increasing energy prices in general and a desire to avoid whatever price premium that may be built into forward fixed prices to cover for price volatility. Understand that by taking this product you are assuming all the market risk.

Consider treating, as pass-through items, cost categories that are difficult for suppliers to predict with accuracy, or are highly volatile month-over-month. In either case, a supplier may need to be conservative in its pricing in order to cover any potential market risk. Alternatively, there is little benefit to pass-through a menu of items simply to get the lowest fixed price possible.

Step 5:
Choosing a Supplier
Make sure you understand exactly what is and what is not included in the price quote from a supplier. Is it an all-inclusive price? Does it include capacity, congestion, Daily RMR and locational forward reserve costs, or are these items to be treated as pass-through costs? Does the contract contain a regulatory change provision or a material adverse change provision which allows the supplier to charge additional costs if there should be a significant change in market rules or in regulatory requirements? Please note, TransCanada’s contract does not contain these provisions – we bear the risk for these events. Does the contract contain a minimum purchase requirement or maximum purchase allowance (‘swing allowance’)? Is the contract crystal clear as to the respective obligations of the supplier and of you, the Buyer?

Assess the experience and financial strength of the supplier. Look into whether or not they own power assets in New England and the nature of these assets.

Learn more about TransCanada:  

• About TransCanada
• Investor Centre

Step 6:
Switch from Utility Service to Competitive Supply
Switching from utility service to TransCanada or from another supplier to TransCanada is performed by TransCanada at no additional cost to the customer. Once your account(s) have been successfully enrolled with us, TransCanada will provide the supply portion of your electricity service (referred to in some states as “generation service”). The transmission and distribution or delivery portion (wire transport from the power plant to your facility) will continue to be provided and billed by your local utility. Your local utility will still read your meter, maintain the poles and wires, and restore power if there is an outage. All suppliers rely on the local utility to supply meter readings for billing purposes.

Step 7:
Renewing your Contract
A contract can be renewed at any time for any starting date in the future, for example, if your contract ends in November you can extend it in March. If you wait until the end of your contract to renew, you may miss earlier attractive pricing opportunities. Extending a contract will have no effect on your current contract rate; however, ask us about opportunities to blend a lower future price with your existing contract rate. Continue to monitor our Forward Electricity Price Index or the forward prices for natural gas to find the most opportune time to extend your contract.

> Back to Top

Glossary

Capacity: The capacity market is separate and distinct from the market for energy. In exchange for capacity payments, generators provide energy to the power grid and demand response resources remove electrical requirements from the grid as directed by ISO New England. The amount of capacity purchased in the market is determined by ISO New England, which establishes the amount of capacity needed to meet minimum reliability requirements (i.e., the amount needed to “keep the lights on”). Changes in capacity market clearing prices over time provide price signals as to the need for new investment in power plants and increased participation in demand response programs.

Congestion: Congestion arises when the transmission lines serving a region are limited in the amount of electricity they can deliver into a region, and consequently it becomes necessary to rely on relatively more expensive generation located inside the region to meet consumer demand. These higher cost units set the clearing prices in the region (called a “load zone”), and congestion costs refer to those times when the clearing prices for electricity in the load zone are higher then the clearing prices in other parts of New England.

Daily Reliability Must Run (“Daily RMR”):  Daily RMR is the term still commonly used in the market place to refer to what ISO New England now formally calls Local Second Contingency Protection Resource Net Commitment Period Compensation (NCPC). Daily RMR costs are ‘make-whole’ payments made to generation resources in constrained areas that are dispatched by ISO-New England for at least part of a day for reliability reasons. These supplemental payments are needed when the revenue earned by the generator over the course of the day in the energy market is less than its operating costs (based on that resource’s offer price).

Forward Electricity Price Index: TransCanada’s Forward Electricity Price Index graphs the historical forward electricity prices in New England. It shows the historical trend of power prices for one and two year retail power contracts. Contact us for more information.

> Back to To