Buying Electricity: Bounding the Risks

Abstract

Businesses spend million s of d ollars per yea r on electricity. In re-
cent yea rs, Ll.S. c omm ercial and ind us tria l cons ume rs used abo u t 0.36
kWh per do llar of gross domes tic prod uct (measured in 1987 do llars).
Some businesses, such as supe rma rkets, are intense users of elect ricity
per square foo t of floor space, and some, such as copper mines, are
adopting new tec hno logies that are extremely ene rgy in tensive. Tradi-
tionally, consumers have obtained the electric energy they need for light-
ing , torque, refrigeration, space conditioning, an d other purposes fro m
their local mono po ly electric utility. However, the trad ition al picture is
changing rapid ly as states begin introducing retail electric competition.
Compe titive procurement of electricity may ena ble businesses to
red uce their costs. Firs t, com peti tive pres sur es w ill tend to lower pr ices
relat ive to wha t they wo uld have been in a regul ated mon opoly env iron-
ment. Second , energy se rvice provide rs ma y package conserva tion ser-
vices w ith electricity, thu s crea ting ad di tional opp ortunities for sav ings.
Th ird, bu sinesses wi th mu ltiple sites will be able to aggrega te their en-
ergy usage and obtain electricity at lower cos t than they could w he n
p ur ch asing electricity for each site as a separa te acco unt. Four th, the
co mpe titive mar ket will enable cons ume rs to purch ase bund les of ene rgy
services that are better tailored to their own situa tions, and not have to
accept standardized service packages, thereby lowering costs .