Probing Residential Demand Charges

What are Demand Charge Rates?

We have become very accustomed to the electric bill we receive every month. This bill has different charges like sanitation, tax, etc. But the largest charge is very likely to be the electric service charge. Put simply, this charge is what the utility company charges to meet your demand, or the amount of power your home consumes, during that monthly billing period. This is what is known as a standard consumption rate, which could be either fixed or variable. But you probably paid a fixed rate, which means that you pay the same rate for your energy regardless of how much or when you need it.

Related: Understanding Your Utility Bill

Fixed rates have been used for a very long time for residential consumers, and are probably the most common rate structure around. However, a different billing policy exists for commercial consumers, one called demand charge rates (DC’s). DC’s are a completely different charge that commercial and industrial sectors have to pay for, along with their consumption rates. A DC can be defined as an extra cost that a consumer has to pay for their maximum demand over a billing period, and can make up around 30% of a utility bill. So, imagine not only paying for the energy you use, but paying more the maximum used at any one time. Kinda lame, right?

Another way to think of this is like turning everything in your house on at the same time. That’s a lot of juice! And the utility will charge for this because they still have to supply you even when everyone is turning on everything at once.

(If you want to learn more about rate design, then check out our article on the ins and outs of rate design! )

Are Demand Charge Necessary?

Demand charges are designed to lower the cost of grid operation during peak hours of demand. DC’s supposedly help utility companies offset the cost of meeting high peaks of demand, which they have to do at all times, and that can be expensive. Utilities have to meet demand 24/7, and to do so they have to operate a lot of expensive equipment and generation plants.

Utilities argue that DC’s help cover the cost of maintenance and construction of wires, transformers, power plants, substation, etc. DC’s also encourage consumers to have a more consistent demand, with smaller demand peaks offset by spreading demand over a larger period of time.

However, charging the consumer more just because they have a peak demand during any given time is not always the best solution. For example, a business could reach its peak demand in system off-peak hours where the total demand on the grid is considerably less significant than system peak demand hours. This means that a business has to pay more for their energy although they are not costing the utility any more to meet their demand.

You can read our article on the Duck Curve if you want to learn more about demand, peak hour efficiency, and the costs of meeting demand during peak hours!

Residential Integration

DC’s have been around for decades in the industrial and commercial worlds respectively, until recently.  The Arizona Public Service (APS) attempted to integrate their residential customers into their Demand Charge policies back in 2016, but was met with frustration and from residential costumers. APS and and regulators were swarmed with public backlash in the form of upset calls and even protest.

The problem with integrating DC’s into residential districts lies in that individual residential homes, even in their peak demand, do not often put adequate stress on the grid to justify charging more. This stress point usually occurs only a few times per year. Furthermore, residential consumers are not used to being charged this way and frankly many do not understand what the charge is much less how to manage it. Simply put, it requires action by the consumer to manage.

Residential demands and peaks are also very similar. For the most part, we all wake up, shower, and use appliances before we leave for work/school, and we turn on the air conditioner when we return. Commercial and industrial facilities, however, tend to have much more sporadic and instantaneous peaks and demands throughout their billing cycles, especially those facilities operate on a 24 hour basis. Not to mention that these facilities require much larger amounts of power than any given residential home.

APS also made errors in giving proper effort to outreach to consumers of what DC’s really are. It takes a long time, sometime years, to adequately inform every consumer of policy changes. Some people don’t watch TV or have a smartphone, and some do not even have an adequate mailing address. So conducting proper outreach is difficult, but absolutely required.

It is doubtful that APS will be the only utility to attempt to push DC’s on their residential consumers.

A Better Alternative

A third rate design currently exists in the world of energy, one that we believe to be a healthier, more efficient one. This rate is called Time of Use (TOU). This system is more complicated than the standard consumption rate, so let’s break it down.

Related: 6 Reasons Time of Use Rates Are the Best Option

TOU rate policies work by monitoring energy use during peak demand hours. Peak hours vary slightly from grid to grid, but utilities generally see a big ramp in demand in the morning hours (approximately 6AM-9AM) followed by another ramp that evening (approximately 6PM-10PM).  Consumers under TOU rates would be charged more for using energy during these hours. But, unlike demand charges, time of use rates only apply if you use energy during hours where the grid is at its most stressed, and not just whenever your home meets its own peak demand. Consumers under TOU’s are generally charged less per kWh in the off-peak hours than consumers who are billed through the standard fixed rates. TOU’s give business and homeowners alike the capability to save money by reducing stress on the system by lowering their demand peaks, which in turn saves money for the utilities, as well. 

But we like TOU’s for a number of reasons. One being that it gives you the ability and encouragement to work around times of peak demand, and you can even save money by doing so. And who doesn’t like saving money? But it does take some amount of work on the consumer’s part to do. If you usually wash clothes in a dryer and washer or keep the A/C or heat on during peak hours, then try and move those times of usage to non-peak hours.

Furthermore, you can install automatic timers on your water heater and other equipment to only make it run during off peak hours. (Trust us, you’ll still have plenty of hot water). Also, and we love this one, you could install solar panels into your home to lower your demand even more! This would be especially helpful if the the highest charges are during the day with the sun is plentiful. TOUs and committing to these changes could save you hundreds of dollars per year on your electric bills. It’s also worth mentioning that a true TOU system would leave out any unwarranted and extraneous fees. You pay for the energy you consume, when you consume it, period.

TOU’s can not only help you save money, but they also provide real help to the grid. If implemented properly, TOU’s will reflect times when the grid is at it’s highest demand. These times are much more costly for utilities to meet as they have to operate a plethora of expensive equipment to do so. Operation of less expensive equipment = money saved for utilities and you.

Our own Tennessee Valley Authority is proposing TOU’s for utility companies such as Huntsville Utilities, but it’s unknown if they have plans to move TOU’s to their other consumers.

Energy Alabama Signs On to Comments Opposing TVA’s NEPA Rule Changes

Energy Alabama, and a host of energy and conservation groups, signed on to comments prepared by the Southern Environmental Law Center opposing changes to TVA’s implementing regulations for the National Environmental Policy Act (“NEPA”).

Energy Alabama is extremely concerned that TVA’s proposed changes undermine transparency, stifle public involvement in TVA’s decisions, and bestow upon TVA almost boundless discretion to decide whether and how it must review the effects of its activities on the people and environment throughout its seven-state service territory, which includes nearly all of Tennessee, and portions of Alabama, Georgia, Kentucky, Mississippi, North Carolina, and Virginia.

To view the full comments, please visit: https://alcse.org/wp-content/uploads/2017/09/2017-09-06-Comment-on-TVA-Proposed-NEPA-Rule.pdf

What is a Value-of-Solar Tariff?

A value-of-solar tariff, or VOST, is a rate design policy that gives customers with solar panels credit for the electricity they generate at a specific price. The credit is then applied to the customer’s utility bill. A VOST usually clarifies how much energy is sold from the customer to utility company and from the utility company to customer; it also determines at what rate the energy is valued. Value-of-solar tariffs are generally viewed as unfair and for two main reasons: the value of the tariff is lower than market rate in most areas and the benefits of VOSTs aren’t broadly advertised. But VOSTs don’t HAVE to be unfair.

As of right now, there aren’t many markets that have fair compensation for solar in the form of VOSTs. The two main places that are under the current implementation of value-of-solar tariffs, Minnesota and Austin, Texas, purchase all of their energy at the utility’s retail rate and pay out a separate VOS rate in dollars per kilowatt hour. In Minnesota, the VOST rate is about $0.145 per kilowatt-hour which is above the residential retail electricity rate of $0.115 per kilowatt-hour. This rate means that for every kilowatt-hour a solar user produces, the user doesn’t have to pay for a kilowatt-hour and they save a little on the electricity they don’t produce but still use. Why would a state or utility pay higher than retail? Because through a VOST process, IF the total value of solar energy is taken into account, there may be cases where it is in fact worth more than retail.  This type of VOST is very customer friendly to encourage the residents of Minnesota to begin producing solar energy themselves; unfortunately, outside of Austin, Texas, the same cannot be said for other states. One of the reasons for less than market rate compensation is the cost of providing the VOST in the first place or other services that utilities must provide for you to sell to them.

What is the unseen value of a VOST?

An end financial value of a VOST is made up of many subparts. For example, some value components include: avoided cost (money saved by the utility from not having to buy additional fuel for the power plant), environmental (the value of reducing harm to the environment and its subsequent cleanup), and transmission system impact (less strain on power lines due to generation being located closer to where it is being used), among others.

For a user to successfully produce and sell back solar energy to a utility company, they have to use the grid. Even if a customer produces the same amount of energy as they use, there are still costs to selling the energy back and for energy used from the grid when solar is not producing. When paying out for solar, utilities have to consider the cost of business (grid maintenance, labor, parts, etc.), which takes a portion out of the amount the customer receives. The need utilities to receive compensation for their services in a VOST to maintain the grid cannot be overlooked.

The second reason value-of-solar tariffs can get a bad reputation is customer lack of knowledge about its benefits. Utilities can better understand customer load, timing, and volume because a VOST separates electricity generated by the consumer from electricity consumed. This is valuable information that utilities can use to better predict when peak times might occur and how much electricity they’re actually using. However, customers may not understand all the variables that make up a VOST or why they are there.

Another reason is how customers receive compensation based on utility-specific benefits and costs of their electricity generation, instead of fixed retail rates that may span many regions. Customers are able to select what VOST is most beneficial to them depending on their energy production and use, as opposed to going with the rate of their region no matter the circumstances.

Value-of-solar tariffs are one of several viable options for solar users to sell back their solar energy, and there are both good (Minnesota and Austin, Texas) and bad (almost everywhere else) ways of providing it to customers. One important aspect that cannot be overlooked is how a VOST is beneficial to the energy system (e.g. the grid) as a whole. With a true integrated value, a VOST can provide the grid with much needed support and gives utilities valuable information; but as it becomes more widespread, concrete worth needs to be given to the value provided from things like environmental and avoided energy costs. VOST has a bright future if implemented correctly, and as more states follow Minnesota’s example, solar will continue to grow more valuable.

Perfect Utility Rate Design

6 Reasons Time of Use Rates Are the Best Option

Previously we discussed the pros and cons of the available utility use rates. In that post we mentioned that while none of the options are perfect we do have a favorite, so here’s

6 Reasons Time of Use Rates Are The Best Option

 

  1. Time of Use (TOU) Rates will lower your bill.

With some simple adjustments to your electricity use habits, you would save a significant amount of money with TOU rates versus standard consumption rates.

  1. A true Time of Use Rate system wouldn’t charge any unwarranted fees.

Utilities are notorious for trying to increase fixed charges and fees. With a true TOU rate, you are only charged for the amount of electricity you consumed (based on when you used it) with no extraneous charges.

  1. Time of Use Rates rates encourage the use of solar.

The current system for most utilities across the country charges a “fixed rate,” meaning you are charged that rate regardless of the amount of electricity you use. Without these fixed charges, TOU rates can encourage the use of solar, especially if the peak rates are during daylight hours.

  1. Time of Use Rates can be available to everybody, whether you’re a business owner or a resident.

Additionally, in most states, TOU rates are already available on a voluntary basis.

  1. Time of Use Rates are good for the consumer and the utility.

If implemented properly, TOU rates are directly related to when the system (e.g., the grid) experiences the most cost. By changing your behaviors, you’re not only saving money but also helping the entire system.

  1. There’s only one downside.

Many don’t know of – or have not seen the benefits of – TOU rates. As such, consumer education would be the greatest barrier for getting TOU rates off the ground. Consumers would need to be educated on how they can actually save money with TOU rates – because, unfortunately, you would not be able to switch to TOU rates and have your bill magically decrease. Saving money with TOU rates would require some work on the part of the consumer. Here are a few things that you would have to do to save more money with TOU rates:

  • Plug devices such as computers, televisions, game
  • consoles, and printers into power strips and turn off the switch when these devices are not in use during peak demand hours.
  • Program your AC/heater to not run as much during peak hours.
  • Use your washer and dryer during non-peak times.
  • Install automatic timers to only run your water heater during non-peak times (trust us, you’ll still have plenty of hot water).
  • Use solar during peak demand hours!

With some careful alteration of your electricity habits, most consumers would save hundreds of dollars a year on electricity with TOU rates compared to standard consumption charges. TOU rates are good for utilities and your electricity bill – and all that’s needed is to get the word out.

Perfect Utility Rate Design

Does a Perfect Rate Design Exist?

Does a Perfect Utility Rate Design Exist?

The simple answer: no. There is no perfect rate design, as there are up and downsides to each. However, we believe there is a best option, and we’ll talk about that in a later blog post. For now, let us analyze the positives and negatives of each of the three main types of rate designs. If you need a refresher on the often-confusing world of rate design, check out our blog post on the topic.

Fixed Charges and Consumption Charges – In many ways, this rate design seems like it would be the most ideal, especially for residential consumers. Your monthly charge would consist of a fixed charge, the charge of being connected to the utility, and a consumption charge based on how much electricity you used during the billing period. Seems great, right? You pay for electricity you use, along with a fixed charge, and don’t pay for electricity you didn’t use. Simple! Well, as it turns out, the word “fixed” is not so fixed… It’s really a relative term.

Recently, Alabama Power has started a “pilot program” that exponentially hikes the fixed charge rate (up to 400 percent!). For now, the rate increase is voluntary and experimental, but it forebodes of future substantial rate inflation. Even now, many utilities across the country are actively trying to increase fixed rates. Fixed charges are generally thought to be bad for consumers because they discourage energy efficiency and renewable energy and are liable to increase without warning (check out our blog post on fixed charges!).

Time of Use (TOU) – Most simply, TOU rates charge customers prices based on the time of day in which the energy is consumed. When the grid is congested, the prices goes up, and when there is plenty of excess electricity available, the prices goes down. This system could encourage energy conservation and efficiency by motivating customers to use electricity outside of peak demand times and to conserve it inside peak demand times. Additionally, no fixed charge means more freedom and incentive to conserve energy. The only downside to this system resides in the amount of customer education it would require, such as learning how to use other means of energy consumption (like solar!) or simply remembering not to consume as much energy during the specified times. Most customers are not used to being charged this way and would need time to adjust.

Peak Demand Charges – Because of the hiked charge on peak usages, this rate design encourages customers to not make large, instantaneous demands on the system, no matter the time of day. This rate design is typically reserved for commercial consumers where it is oftentimes necessary or unavoidable to use large amounts of electricity at one time. Of course, there are ways to somewhat decrease high peak demand charges (such as installing solar if you have a daytime peak or spacing out electricity use more smoothly), but the rate design is still imperfect. Peak demand charges, then, can be a good, sensible idea but tend to be impractical in the sense that each customer’s individual peak isn’t always as necessary as the system’s overall needs.

Choosing the right rate design is difficult; each one presents its own challenge to overcome. The question to ask when pondering the plethora of rate design options is “Which one is best, not easiest, for the energy sector?” We’ll leave you with that hint until the final blog post in this series, where we will explain in detail why we believe a certain rate design is the best.