Updated: Jun 14, 2019
Ah, the elusive 'cap tag.' First of all, what exactly is a cap tag? Secondly, how do cap tags affect overall energy pricing? And lastly, why does it matter? We receive many questions on this topic, so we thought we'd provide some transparency (since that is our thing). Read on to learn why everyone should care about cap tags.
This week, we will be talking about an important electricity line item that we receive a lot of questions about: cap tags.
A cap tag is a measure of a customer’s usage of electricity when overall demand on the grid is high. More formally called a PLC (Peak Load Contribution), it is a kW value during the hour (or hours, depending on the ISO) when the grid is at its annual peak load. These peak hours occur during the summer and then drive a customer’s costs for the following June-May year. The grid operators need to ensure that there is enough generation capacity in the system to produce power at those high load times, even if there are few hours during the year when those generators are actually needed, so load is charged based on their contribution to the system peak. An analogy to this might be when you choose to buy a car with a larger engine; you have to always pay for that engine even if you rarely drive above 35mph.
So, how do caps tags affect overall energy pricing?
A cap tag determines how much a customer pays for capacity during the year; however, the customer’s usage the rest of the year also goes into their load factor, which determines how high or how low a customer’s per kWh rate should be. Capacity is charged based on the kW cap tag, but customers are billed based on their kWh volumetric usage, so capacity costs are unitized to a per kWh rate for billing. In other words, the capacity cost ($) based on the tag is divided by usage (kWH) to get a unitized $/KWh rate.
What that capacity billing rate looks like is based on a customer’s load factor. Load factor is a measure of how consistently a customer uses electricity. The more consistent a customer’s usage pattern, the higher the load factor.
Example 1: Higher load factor, lower capacity rate
One example of this is a data center, which uses electricity consistently whether it is day or night, hot or cold out, etc. Therefore, that data center likely uses the same hourly consumption during the system peak hour as they do the rest of the year, resulting in a load factor of around 100%. This means that the capacity costs charged based on the cap tag are spread out over consistent usage throughout the year, leading to a lower unitized capacity rate.
Example 2: Lower load factor, higher capacity rate
The opposite of this might be a residential customer with gas heat, who comes home after work on the hottest day of the summer, cranks up their air conditioning, and then has all their lights and TV on at that system peak hour in the early evening. During that peak hour, the customer was using more electricity than they do during most hours--because for most hours they are at work, or asleep, or using gas heat to adjust the temperature in their home. This customer’s peak contribution was much higher than their typical consumption, leading to a lower load factor and a higher capacity rate.
Cap tags are a very important part of a customer’s energy costs. Customers may therefore try to curtail their usage during these peak hours in order to lower their cap tags and save money over time.
Cap tags are also important for a retail energy supplier pricing a customer’s load. If a customer’s load factor changes significantly during a multi-year contract, then that initially accurate price could become inaccurate as tags change over time. Therefore, it is important for suppliers to price capacity accurately and to use the most up-to-date capacity tags when pricing. Capacity tags and usage are imperative for pricing and have a large impact on a customer’s rate.
For market-tested forward and capacity curves that capture daily market shifts and ensure accurate energy pricing, get in touch with our energy professionals at email@example.com.