3 Ways Load Factor Is Changing The Energy Broker Business Model
Whether you’ve been an energy broker for five years or five days, chances are you have heard the term “load factor” thrown around a lot. In email chains with suppliers or at the water cooler, you might be familiar with these common questions and statements…
“How’s that customer’s load factor?”
“What’s the load profile look like on that?”
“Will they take customers with load factor less than 40%?”
“Let me check the load factor and get back to you.”
Load factor, the two-word phrase that seems to be dominating the retail energy world. But, what is load factor? Why is it important? How is it calculated? And why should you care? All great questions. In this article, we will outline the top ways load factor is influencing the retail energy broker space.
Understanding Load Factor
First, you need to understand the fundamentals of load factor in order to understand its effects on your customers and supplier price quotes. In simple terms, load factor is a representation of the amount of electricity a customer could consume (based on their building’s power demand) compared to what that customer is actually using. Confused yet? Don’t worry. Let us give you a real life example…
Let’s say there are two identical restaurants next door to each other. They have the exact same equipment, lighting, freezers, etc. In fact, the amount of electricity they demand from the grid is identical.
The only difference between these two restaurants is one restaurant is open 12 hours per day, 7 days per week, and the other is open 24 hour per day, 7 days per week. Here is what the energy profiles look like for both businesses:
Restaurant B (open 24 hours per day)
50 kW of electricity demand
350,400 annual kWh of electricity usage
Restaurant A (open 12 hours per day)
50 kW of electricity demand
175,200 annual kWh of electricity usage
Restaurant B uses twice the amount of electricity (kWh) as Restaurant A since it is open twice the amount of time. Notice in the example, however, that both restaurants have the exact same demand (50 kW).
Electricity demand can be a tricky thing to understand. It is different than electricity usage (kWh). Demand is simply the total amount of power a building requires from the grid at any given time based on the amount of equipment, lights, etc. that are turned on. Since each piece of equipment has a wattage rating, that is the maximum amount of power the equipment can demand at any given time.
Electricity usage, however, is a different story. Usage is the amount of electricity that is demanded over a period of time. So if you are demanding 50 kW of electricity for 10 hours straight, then your electricity usage is 500 kWh (50 kW x 10 hrs).
In the restaurant example above, because both buildings have the exact same equipment, when it is all turned on, both buildings demand 50 kW of electricity. However, Restaurant B uses more electricity (kWh) since those motors are turned on for a longer period of time. This difference is the essence of load factor.
Load factor is calculated by predicting what a customer’s total electricity usage (kWh) could be for the year based on their demand (kW), and then comparing that number to what the customer actually did use (kWh). Let’s take a look at our restaurants again:
Restaurant B (open 24 hours per day)
50 kW of electricity demand
350,400 annual kWh of electricity usage
Restaurant A (open 12 hours per day)
50 kW of electricity demand
175,200 annual kWh of electricity usage
Both restaurants have the potential to use 438,000 kWh based on their 50 kW demand:
50 kW x 24 hours per day x 365 days per year = 438,000
It is unrealistic to assume that the restaurants will have every single light and motor turned on 24 hours per day, 365 days per year, so instead, we look at what they actually did use… Restaurant A = 175,200 and Restaurant B = 350,400. Now, comparing the actual electricity consumption numbers to the total potential usage of 438,000 gives us our load factor rating for each building.
Restaurant B (open 24 hours per day)
80% load factor
350,400 kWh / 438,000 kWh = 80%
Restaurant A
40% load factor
175,200 kWh / 438,000 kWh = 40%
Why Load Factor Is Important?
Now, you might be asking yourself “So what? Why is load factor so important?”. Well, load factor plays a critical role in retail energy pricing. When energy suppliers purchase electricity in the wholesale market on behalf of a customer, the customer’s total electricity demand (kW) affects part of the suppliers cost (transmission & capacity). And since suppliers bill customers for their usage in $/kWh, customers with more usage can sometimes qualify for cheaper rates. Here’s how it works:
Let’s assume that a supplier's cost for a customer with a demand of 50 kW is $5,000 for the year for transmission and capacity. And let’s apply this example to our restaurants:
Restaurant B
50 kW
$5,000 cost
350,400 kWh
$0.0143/kWh
Restaurant A
50 kW
$5,000 cost
175,200 kWh
$0.0285/kWh
Both restaurants have identical demand (50 kW) resulting in a total demand cost of $5,000 for the supplier. Since Restaurant A uses less kWh, and the supplier bills the customer in kWh, they need to charge more per kWh to cover their costs. Since the rest of the electricity rate is based on the electricity market commodity price and is the same for both restaurants, Restaurant B will pay a lower price for their electricity rate when compared to Restaurant A.
Lower load factor means higher prices, and higher load factor means lower prices. Here are some of the ways load factor is affecting the way energy brokers operate…
1. Matrix Pricing
Most retail energy providers publish a daily matrix rate in each utility where they serve customers. Supplier matrix pricing are energy prices that include the suppliers costs and margin. Brokers, in turn, are allowed to add their fees on top of the matrix rates and present them to customers.
Since we learned above that retail energy pricing is heavily predicated upon load factor, energy suppliers must assume the load factor costs of their matrix rates. Typically, suppliers will set their rates based on utility averages or their own internal calculations for a specific market.
Some suppliers have strict rules about load factor when it comes to using their matrix pricing for customers. In fact, certain suppliers refuse to accept matrix deals from brokers for customers that are below a certain load factor threshold. Other suppliers, on the other hand, do not have load factor requirements for their matrix products. These suppliers will accept customers with any sort of load factor rating.
Understanding the specific load factor rules by supplier is critical to pricing matrix deals as an energy broker. Furthermore, the broker must have the tools to calculate load factor before using a matrix rate in order to avoid a deal rejection. Using tools such as Edge’s Matrix Pricing application allows brokers to easily sort matrix prices from multiple suppliers, find the lowest rates, and identify the supplier’s specific load factor requirements. Other tools, such as Edge’s ECL application, allow brokers to quickly calculate load factor for a customer account prior to pricing.
2. Custom Quotes
Since most matrix pricing is based on average load factor ratings, customers with higher load factors can benefit handsomely from custom supplier quotes. Typically, any account above a 60% load factor rating can almost always get a lower customer quote than that which appears on a supplier matrix. Using tools like Edge’s ECL application to calculate customer load factor can help energy brokers identify those accounts that should be custom quoted. Lower quotes from suppliers mean higher margins for brokers and lower prices for customers.
3. Hybrid Products
Another way to use load factor ratings to your advantage comes with understanding more sophisticated supply products offered by retail energy providers. Since load factor is directly correlated to a customer’s energy demand figures, finding ways to lower demand can help to increase load factor in order to get more favorable pricing. When a customer enters into a fixed price agreement with a supplier, they are paying for all of their energy costs in a single rate ($/kWh). In this case, whatever the customer’s load factor rating was at the time of pricing gets locked into their fixed price for the term of the agreement. So, if a customer implements any sort of energy efficiency methods to lower their energy demand, their retail rate is unaffected - even though they increased their load factor rating. If a customer has high demand and a lower load factor rating, they can attempt to lower their demand through LED lighting projects, smart thermostats, solar, or other energy efficient technologies. A customer with plans to do this in the future can elect to unbundle their fixed price and pay for their supply charges that are predicated on demand in real time. Entering into a hybrid supply product like this allows customers to realize these energy efficiency savings as they occur, both from reduced energy usage and from a lower supply rate. For more information on how to structure these deals for your customers, please contact our energy services team here.
Edge On Demand
In conclusion, load factor is the key element that drives retail electricity pricing in most deregulated markets. As an energy broker it is critical that you understand how to calculate load factor, the ways it affects your price quotes, and other methods for gaining a competitive edge using this knowledge. At Edge On Demand, we pride ourselves on our robust tools and technology to help our broker clients not only calculate load factor but also manage their energy businesses. Contact us today for a free demo.
09/14/2022