Chicago and San Francisco have become leaders of an emerging movement, called “electric aggregation,” where cities buy cheap bulk electricity for the benefit of their citizens.

Electric aggregation enables cities to lower energy costs, which Chicago has done, and to dictate how electricity is supplied, which San Francisco and Chicago have both done.

Under electric aggregation, a municipality, usually a city or suburb, enters into a long-term power purchase agreement with an electricity supplier on behalf of its citizens. By negotiating a new price for all of its residents under one contract, a municipality can use its bargaining power to lower electricity rates and demand certain types of supply.

The local incumbent utility continues to operate and maintain its transmission and distribution network. A new electricity supplier, chosen by a municipality through a competitive bidding process, enters into supply agreements with electricity generators and sells that power to customers.

Though they may seem similar, electric aggregation programs are different from having the city take back the concession from the local utility and vesting it in a new municipal utility. Municipally-owned utilities, like investor-owned utilities, maintain transmission and distribution lines, provide customer service and purchase (or generate) electricity for customers.

By implementing an electric aggregation program, a municipality only assumes a purchasing function and only within the political boundaries of that municipality. The transmission and distribution lines, as well as billing and customer service, remain the province of the incumbent utility.

Chicago Program

Last November, Chicago voters approved their city’s plans to create such an electric aggregation program. All of Chicago’s residents will begin receiving electricity under the new program in March. Rather than replacing the functions of the incumbent utility, the city government’s role was to design its aggregation program and then negotiate a supply contract with its new electricity supplier.

The Chicago City Council selected Integrys Energy Services as its new electricity supplier for a term of two years, replacing Commonwealth Edison, an Exelon subsidiary. The electric aggregation supply agreement between Integrys and the city of Chicago is the largest in United States history, worth an estimated $300 million. Under the program, Integrys will sell electricity to more than 900,000 customers. When the contract term ends in May 2015, Chicago will be free to choose a new supplier.

Chicago residents will see their electricity rates drop from 8.319¢ per kilowatt hour to 5.424¢ per kilowatt hour. With nonelectricity charges included, residents will typically see their bills lowered by 20%. Those savings relative to Commonwealth Edison’s electricity prices will shrink when Commonwealth Edison begins delivering electricity under new, cheaper supply contracts, which it will sign in June, but savings are still expected to be between $130 and $150 per customer over the next two years.

The Chicago electric aggregation plan requires that Integrys’ rates stay below Commonwealth Edison’s. After May 2014, Chicago has an option to switch providers if Integrys cannot or does not beat Commonwealth Edison’s rates. The city’s option is particularly significant when Commonwealth Edison sheds the supply contracts it signed in 2008, which are expensive relative to prices in today’s electricity markets.

Chicago has also banned coal-based electricity from its new contract with Integrys. Currently, coal provides roughly 40% of Chicago’s electricity. Under the new contract, electricity will mostly be generated by natural gas plants. Integrys has already entered into an agreement with NextEra Energy Resources to supply much of that natural gas generation.

The ban on coal points to another reason why municipalities opt for electric aggregation: to control the source of their electricity. The ban demonstrates that electric aggregation can be used as a way to promote clean energy. In some cities, San Francisco being the largest, electric aggregation is also being used to spur new renewable energy development.

By choosing electric aggregation, Chicago is bringing it national attention and proving that, for the moment, a city’s goals of lower prices and cleaner electricity need not be mutually exclusive.

Enabling Electric Aggregation

Electric aggregation requires state authorizing legislation. Six states have passed enabling legislation giving municipalities the power to aggregate electric loads.

Massachusetts was the first state to enable electric aggregation, doing so in 1997. Ohio followed in 1999. Rhode Island and California authorized electric aggregation in 2002, and New Jersey passed its own legislation in 2003. Illinois passed enabling legislation in 2009 and, since then, more than 200 communities within Illinois have approved electric aggregation. Chicago voters added Chicago to those ranks in November when they approved a ballot referendum authorizing the City Council to move forward with aggregation.

The details of electric aggregation programs vary. The type of electricity that programs offer depends on local goals. The price of electricity also varies, as do the customer classes for which the program is available. Residential customers are the most common participants.

Electric aggregation programs also differ in how they enroll customers, which is often a point of contention. Programs can either include opt-out provisions, where customers are automatically enrolled, or opt-in provisions, where customers have to choose to be a part of the electric aggregation. Not surprisingly, opt-out programs have far higher participation levels than opt-in programs.

Most municipalities moving to electric aggregation do so to reduce electricity prices.

However, some are as interested in promoting clean energy. For example, San Francisco, Marin County, California, and Cape Cod, Massachusetts have all used electric aggregation as a way to promote renewable energy. All three areas have or will have 100% green power options, and the same is true for Cincinnati. Programs in these areas may offer as much incentive to renewable energy developers as state renewable portfolio standards.

Oak Park, Illinois, a suburb of Chicago, offers a local wind option to roughly 20,000 accounts at a cheaper price than the standard incumbent utility rate. Evanston, Illinois, another Chicago suburb, has similarly favorable pricing for renewable energy options.

The advantage of renewable energy options over incumbent supply in Illinois communities may be short lived. Like in Chicago, as incumbent utilities shed expensive long-term supply contracts in favor of new, cheaper agreements, the spread between electric aggregation prices and those offered by incumbent utilities will shrink.

A Tale of Two Approaches

Chicago and San Francisco are the two largest cities in the United States to have adopted electric aggregation, though they did so under different political circumstances and to different effects. In particular, the two cities’ programs will have different long-term impacts on electricity prices and generation mixes, with San Francisco planning to encourage more renewable energy development.

The Chicago electric aggregation program focuses primarily on lowering short-term electricity costs for customers. Chicago also banned coal from its generation mix under the contract with Integrys, recognizing that it could do so in the process of lowering prices.

Chicago’s electric aggregation program will probably also include energy efficiency and renewable incentives for customers, though the details of those programs are as yet unclear. The city is also trying to buy part of an Illinois wind farm to ensure some supply from local renewable energy projects.

In contrast, San Francisco is promoting renewable energy as its primary goal. The San Francisco program, called CleanPowerSF, has the potential to spur hundreds of megawatts of new renewable energy project development in California. It will offer customers 100% green power with an opt-out choice for customers who do not want to pay more for renewable energy.

Starting in mid-2013, 90,000 San Francisco residential customers will be enrolled with CleanPowerSF. Most likely beginning in the following year, half of all eligible residential customers in the city will be automatically enrolled with CleanPowerSF, with the other half able to opt in.

The San Francisco Board of Supervisors chose Shell Energy North America as its electricity supplier. Most of the electricity will come initially from regional wind farms. To satisfy the 100% renewable requirement, Shell Energy will also purchase renewable energy certificates, which, though not the electrons themselves, ensure that a unit of electricity associated with the certificate was generated by a qualified renewable energy project. The additional demand could help the state REC market.

As CleanPowerSF matures, San Francisco should encourage development of new renewable energy projects and even fund some of them with special purpose municipal bonds.

In 2001, San Francisco created a class of bonds, called H-bonds, to finance renewable energy and energy efficiency projects. Because CleanPowerSF will bill customers for electricity directly, the city will have a dedicated revenue source with which to pay debt service on the bonds. The bonds allow borrowing at a reduced interest rate.

Two other municipalities — Cape Cod and Marin County — also included new renewable energy development as part of their electric aggregation programs, building or planning to build 18.2 megawatts and 31 megawatts of solar, respectively.

Electric aggregation can be controversial. Three out of 11 San Francisco City Council members opposed the scheme, as did the mayor, worrying that automatic enrollment might confuse residents while leaving them with higher bills. The Pacific Gas and Electric Company, the incumbent utility, resisted electric aggregation, as it had in Marin County.

Chicago’s was a smoother process since its electric aggregation was a relatively easy sell to consumer advocates. Electricity prices will drop immediately for Chicago customers, but not for San Francisco customers.

Looking Ahead

It is unclear how many other states will pass enabling legislation in the coming years.

Aggregating electric load has the potential to fall out of favor as incumbent utilities face declining load growth and cheap natural gas, which is driving down wholesale and retail electricity prices. New wholesale supply contracts utilities sign to buy electricity from independent generators will often be cheaper than the contracts they replace.

At the same time, some municipalities that favor renewable energy may find electric aggregation appealing in states that are close to meeting their renewable portfolio standards. Electric aggregation is a way to continue ratcheting up the percentage of clean energy. For the moment, Chicago, San Francisco and other aggregated municipalities have the potential to change the way that cities think about their citizens’ electricity.