When you turn on a light or charge your phone, it’s easy to forget that the electricity powering your home has already traveled tens if not hundreds of miles and gone through a complex and carefully regulated process before it ever reaches you.
In New Jersey, since the early 2000s when the state restructured the electricity market to encourage competition for energy supply, customers have had the option of procuring their electric supply from an alternative (third party) energy supplier (TPS) or from their electric utility through what is referred to as Basic Generation Service (BGS).
To provide BGS for customers, New Jersey utilities like PSE&G purchase power from wholesale suppliers through a competitive auction that is annually reviewed and approved by the New Jersey Board of Public Utilities (BPU). This auction (the BGS auction) takes place every winter and helps establish the electricity supply rates that go into effect the following June. It’s designed to ensure fairness, stability and provide competitive pricing that’s reflective of wholesale market conditions. Understanding how this system works helps explain why energy prices change and how the BGS process design protects consumers from sudden market swings.
What is the Basic Generation Service (BGS) auction?
The “BGS auction” is actually comprised of two separate auctions — the BGS-RSP Auction and the BGS-CIEP Auction
The first, the BGS‑RSCP Auction, procures supply for residential and small business customers (RSCP) and uses a “descending clock” format — a type of reverse auction to annually procure one-third of the total RSCP load for a three-year term.
How does the residential BGS auction work?
The auction process is designed to be competitive –limiting the amount of load an individual supplier can serve.
The auction begins with a specific “starting price,” and participating wholesale suppliers offer bids indicating how much electricity they’re willing to provide at that price. If the amount of supply exceeds what is needed, the price drops and suppliers again offer how much they will supply.
Round by round, the price continues to fall until supply and demand align – with winning suppliers committing to serve specific percentages of RSCP load at the final auction clearing price. Because only one-third of the total load is procured each year (for a 3-year term), a given year’s BGS-RSCP supply rates are determined by the results of three separate BGS-RSCP auctions.
As a result, residential and small commercial customers served on BGS are largely cushioned from sudden swings in wholesale energy prices. The result is generally more gradual and predictable changes in BGS supply rates than would occur if all supply was purchased at once each year.
How does the BGS-CIEP auction serve large business customers?
The second annual auction, the BGS-CIEP Auction, serves the largest commercial and industrial customers that are not being served by a TPS. If served on BGS, these customers pay real-time wholesale energy prices from the regional power grid, PJM Interconnection, plus a charge that includes the cost of capacity and renewable compliance that is determined through the BGS-CIEP auction (that also utilizes a descending clock format).
Who oversees the BGS auctions?
Independent experts run the auctions to ensure that no supplier has an unfair advantage, and the BPU oversees the entire process to maintain transparency and consumer protection. After the auction concludes, the results are reviewed and approved and establish the default supply rates for customers who have not selected a TPS. It is important to note that PSE&G does not profit from the supply rates.
This process to obtain electric supply benefits the public by encouraging competition among wholesale suppliers, which helps to keep prices fair and reasonable. It also reduces volatility by spreading purchases over multiple years and utilizing the results of several annual auctions to set customers’ supply rates, while helping ensure that no supplier is favored.
For customers served on BGS, this means that if you do nothing, your electricity supply is automatically purchased through this statewide auction. If you chose an alternate third-party supplier, the infrastructure delivering your power and the service you receive from PSE&G remain the same.
