Busting The Myths on Aggregation: Myth #1 – Exponential Savings
In the formation of the Southeast Ohio Public Energy Council (SOPEC), electric aggregation promised to bring affordable energy through “bulk purchasing power” – that is, the more electric customers in the aggregation pool the lower the price. The narrative spoke as to why people should not opt-out of the aggregation program and should trust that people would stay in, thus leveraging the power of numbers to achieve exponential savings over time.
Unfortunately, this is not how electric or natural gas aggregation works. If the aggregation program continued to provide exponential savings as more customers joined over time, then eventually the large number of aggregated customers would see near-zero electricity rates – which is impossible. The “bulk purchasing” phenomenon makes sense for retail shops, for example, who would rather see more products go off the shelf resulting in more sales and sales revenue. This is common to see at the grocery store or large club-based food outlets. This does not work so well in the power market, however, as the cost to produce electricity varies from month-to-month depending on supply costs.
As you see in the graph below, the dotted exponential savings line would see prices falling as aggregated customers increased. The solid gray line represents the default price given to customers by the electric distribution company and because distribution companies are separate from power producing companies, by Ohio law, they can establish a “price-to-compare”, also called the “standard service offer” (SSO), to customers who do not shop on the open market for a better price.
Electric aggregation essentially allows an entity like SOPEC, a coalition of multiple governments, to shop on the open market for a better price for an entire aggregated community or multiple communities. Usually the SSO price fluctuates because of the variable nature of producing power from month-to-month, but this graph highlights how electric aggregation programs, the solid green line, can achieve a better rate as compared to the SSO rate. If energy prices are trending downwards, meaning prices are falling, then aggregation administrators can recognize the trend and negotiate a lower price for the aggregated community at a fixed rate for many months, avoiding the variable nature of the SSO rate. Same goes if energy prices are trending up.
There are some savings achieved by bundling customers in an aggregated pool, as retail energy providers usually spend close to $50 to gain a new customer by competing on the open market with other retailers. SOPEC, working exclusively with AEP Energy, a retail energy provider, can argue that many of the aggregated customers could have easily shopped around for a different energy product, not provided by AEP Energy. In this case, AEP Energy sees value in that argument and is likely to offer a fixed rate for the aggregated program that provides substantial savings to each customer in the pool.
Aggregation programs, whether for electricity or natural gas, are a great tool for communities. All aggregation programs require a very small administrative fee built into the negotiated price, which can be passed on as savings to the aggregation customers or can be used to build unique programs, such as providing energy efficiency services or building renewable energy projects for the aggregated community. Nevertheless, the administrative fee is usually far less than the administrative and overhead costs built into the price offered by retail suppliers or the SSO rate provided by the distribution company. Exponential savings? Not so much. Greater community choice, valuable savings, and the ability to create unique energy programs? Absolutely.