Understanding Today’s Energy Pricing

Posted on January 7th, 2014 by

IceBank Tanks

Energy costs are one of the greatest concerns of commercial building managers. Utility bills are constantly monitored and there are ongoing initiatives to improve energy efficiency to lower costs. However, energy pricing is extremely complex and often misunderstood. It’s not always how much energy you use that affects your monthly bill, but when you use it. Electricity like everything else we purchase is subject to the rules of supply and demand.

Time of Use Pricing: Peak vs. Off-peak

You might have known that electricity is cheaper at night. But did you know it is almost half the price of daytime electricity? According to the Edison Electric Institute, the only form of energy that has stayed the same cost or gone down in the last 30 to 40 years has been off-peak electricity, which occurs during those nighttime hours when demand for energy is low. On the other hand, the cost of daytime electricity has been steadily increasing over time, especially during peak demand hours, when the demand on energy is at its highest and the power grid is closest to its maximum capacity. Most of this demand can be traced to our heating and cooling needs as evidenced by  air conditioning making up 40 percent of a building’s peak electricity use.

Since the energy grid can only generate a finite amount of power at a time, energy providers increase prices during peak demand periods in order to balance energy use against capacity. That is what leads to the dramatic differences in energy pricing during peak and off-peak hours—energy providers must manage power use in much the same way as consumers of that energy.

Time of day pricing is the simplest way that power providers manage energy use. There is more than meets the eye—the most misunderstood of all is demand billing.

Uncovering the Mystery of Demand Billing

Unlike residential electric rates that charge only for the kilowatt-hours (kWh) used each month, commercial facilities are also subject to demand (kW) charges, meaning their bills are calculated based on both consumption and demand. The energy charge is based on the total amount of electricity used by the customer for the month but the demand charge is based on the highest rate of electrical use, which occurs during any 15 or 30-minute period during the billing month. In addition some utilities have something referred to as a  “ratchet”, whereby a customer will continue to pay high demand charges in future months, based on the “peak demand” set in previous months.

Even if you have a “flat” electrical rate day and night, most electricity suppliers and distributors implement a demand charge to cover fixed costs related to the building and maintenance of the additional infrastructure needed to generate, transmit, and distribute the extra electricity required to accommodate peak demand. In many cities, the full capacity of the energy grid is tapped less than 100 hours a year. Nevertheless, utilities must have the capacity available year-round and charge customers to cover the associated costs.

Many businesses don’t realize how greatly these demand charges can affect their utility bill.

Demand billing has greatly increased over the last ten years. According to the Facilities Engineering Journal, demand charges have gone from $16 to $26 for Pacific Gas & Electric in California, with a 25 percent increase in the last year alone. And in Georgia today, an electric bill for a typical office building is 82 percent demand charge.[1]

Demand Response Programs

Besides time of day pricing and reducing demand charges there is another way to save. Demand Response is a general term for volunteer programs, that some utilites offer, that pays customers to reduce their electric usage for a certain period of time, normally about 4 hours.  These “calls” for reductions occur when the grid is nearing it maximum capacity.. In the past utilities requested large consumers to voluntarily lower their energy consumption. until supply and demand was stabilized. To avoid subsequent blackouts and brownouts and to avoid purchasing more infrastructure to meet peak demands, some grid operators pay  commercial electricity consumers these formalized demand response agreements to reduce their power used during peak demand times. Customers can get paid as if they were a “virtual power plant.” So instead of the grid operator paying the power provider (a generator) to meet peak demand, the grid operator pays businesses to curtail consumption, with the same result. With demand response, businesses can actually generate revenue by selling “negawatts” back to the power company.

A 2009 report prepared for the Federal Energy Regulatory Commission estimated that demand response programs have the potential to cut peak energy use in the U.S. by as much as 20 percent by 2019.[2] Since every utility does not offer the same demand response programs, it is best to contact your utility provider in order to find out what programs your structure may qualify for.

Thousands of organizations are reducing their power consumption during peak times. Ways they take advantage of demand response include shutting or dimming down lights, turning off the HVAC, boiler or fans, modifying chiller or boiler temperatures, shut down of some elevators or escalators, turning off cooking equipment and serving cold food, installing PV to offset portion of energy used for demand response events and thermal energy storage. Most demand response activities occur during peak demand hours, which are usually in the afternoon during business hours. To keep their tenants and employees at a comfortable temperature and with the proper lighting in the summer one demand response strategy stands out.

Thermal energy storage

In the summer, many buildings do just let the temperature creep up slightly during demand response events or dim the lights. However, energy storage has the greatest demand response impact while not affecting indoor comfort. Thermal energy storage is an HVAC technology that makes it possible to turn off a chiller to reduce the electrical load of the chiller plant during the peak period while still maintaining the desired temperature.

The most common form of  thermal energy storage in residential use is the domestic hot water heater.  However in commercial buildings since the cooling load is very large and occurs during the worst time for the utilities, the most common use for thermal energy storage is that of storing cooling, normally in the form of ice.  Ice is produced and stored in tanks at night, and then melted during the day to cool building occupants. With the ability to store ice, businesses can get paid for participating in demand response programs, harness cheaper nighttime electricity to cover their daytime electricity needs for air conditioning, and reduce demand charges. Thermal energy storage is gaining momentum as businesses recognize the economic impacts of reducing peak demand; that it not just how much energy you use but when you use it.

Thermal storage use promotes efficiency beyond the building meter.  At night power is typically generated and transported more efficiently than on peak generation. In addition clean renewable wind , which is becoming a larger component of generation on the grid and helping to reduce emissions, mainly blows at night and so needs to be stored for on peak times. Ice storage is a very cost effective way to store that wind energy for use during much more valuable time periods.  These benefits are passed on to consumers through various pricing strategies.

Ice storage has been known to lower cooling costs in half by taking advantage of lower night time energy costs and reducing demand charges. Now with demand response, businesses can generate additional income conserving energy when it is most efficient to do so.

Next steps

Reviewing electric bills can be a daunting task. Don’t assume your bill is just based on a flat rate. Most electricity bills have demand charges included in some shape or form. Demand charges should be broken out as separate charges on your electric bill, but that is not always the case. If you don’t see them, your utility account rep or generation supplier should be able to break those charges out for you. There are often separate demand charges listed for generation, transmission and distribution. You’ll need to look at your entire bill including demand charges over a period of time to really understand how time of use affects the costs of electricity. The Association of Energy Engineers (www.aeeprograms.com) offers a web-based course on load profile analysis. Once demand charges are understood, you can now tackle how to minimize them. Not an energy engineer? Thermal energy storage companies and 3rd party software demand response providers are also great sources of knowledge and can help you determine potential savings from your local time of use pricing, demand charges and demand response programs.

[1] Facilities Engineering Journal, The Free Lunch Algorithm

[2] The Wall Street Journal, Money for Nothing: How to get big customers to use less energy? Pay them for power they don’t use.


Written by Mark MacCracken, CEO of CALMAC and former chair to the USGBC.

Related Posts:

Tags: , , , ,

This blog is kept spam free by WP-SpamFree.