When Electric Utilities look to craft their rate structures (tariffs) to submit for their State’s Public Utility Commission approval, they seek to cover costs and earn a rate of return for various types of services. First, they must ensure they have a monthly revenue stream regardless of whether they deliver a large amount of power, or none at all. This is generally accomplished by instituting a Monthly Charge for electric service irrespective of levels of consumption. Next, they must ensure that they earn a return and cover marginal costs for the distribution of energy at a local level (from substation to meter), this is generally addressed by the regulated Distribution rate quoted in $/kwh delivered. In addition, there is a separate cost utilities face for the wholesale cost of energy delivered to a substation prior to distribution. The Energy portion of the bill addresses this cost and is quoted in $/kwh. It is the Energy line item that is the only cost element that fluctuates with market prices in deregulated markets. Lastly, most utility tariffs for commercial or industrial customers will have a Demand Charge, this is quoted in $/kw or $/kVa. Unlike Distribution or Energy which are assessed against the flow of energy over time, Demand Charges are essentially a snapshot of maximum electric instantaneous usage measured within a fairly narrow timeframe, generally 15, 30 or 60 minutes. This is also often referred to as “Peak Usage”.
Components of Demand Charges-
Because most energy management programs often are grounded in principles of conservation and are therefore geared to focus on the levels of usage, charges which are based upon peak usage do not generally receive the amount attention they may deserve. For example, Demand Charges based upon peak usage can approach 50% of the entire electric bill for commercial or industrial customers (residential tariffs generally do not incorporate demand charges). Contributing to this lack of focus is the complexity and opaque nature of many Demand Charges. This category of electric rates is generally structured to vary based upon a few key criteria generally described in the tariff details in the “Determination of Demand” section of utility documents. These criteria include: 1) Observed level of maximum demand (15, 30 or 60 minutes), 2) Observation time period during which increments of maximum demand can potentially occur (daily, monthly, multi-months), and 3) Beginning level of measurement (tier) in kw or kVa (>10kw, etc.), and 4) Limiting Factors which may need to be further applied to observed peak usage such a higher or lower than another peak measurement (Ratchet, Contract Demand), and lastly 5) Determinant of Peak Demand (Customer Peak, System Peak).
Types of Demand Charges-
By far the most common type of demand charge is generally referred to as Monthly Demand Charge. Under this rate structure the customers peak demand is measured in 15-minute intervals throughout the monthly billing period and their highest kw reading is assessed against the demand rate $/kw or $/kVa. Below is an example of a set of monthly demand charges for Baltimore Gas and Electric’s C-GL Tariff as seen in Clarity’s Tariff Detail screen:
In this case there is a Demand Charge for service in the “base tariff” as well as two special charges assessed for specific services, Transmission and Energy Cost Adjustment (ECA) charge. When displayed as a series of Monthly bills with a demand component no further detail on breakout of charge by type of demand charge is displayed (below):
However, the component details for each demand charge can be downloaded in the Download Calculation Details tab with results for each value need to calculate the charge (bold).
-Monthly Demand Tiered
Followed closely by Monthly Demand Charge, is Tiered Monthly Demand Charge as one of the most common demand charge types. Under this structure the customer is essentially given a “pass” on peak usage up to a certain level, and then all subsequent peak power usage is charged at the applicable rate. An example of this type of structure can be seen with Southern Indiana Gas and Electric’s (Vectren) C-DGS1 Tariff. The details of the tariff can be seen below with the Tier described in Charge 1:
The demand charge component of each monthly bill is expressed in dark green, and the details again are available through the Calculation Details download:
-4CP Demand Charge
Electric Utilities are often charged by Independent System Operators (ISOs) for their customers peak usage not based upon each monthly peak, but instead upon a snapshot of usage during peak demand on the entire electric grid during certain months of the year, or Coincident Peak (CP). Therefore, Utilities will look to structure demand charge rates assessed to customers so as to cover these costs. The number of periods for which measurement will occur can vary by tariff, hence 1, 2,3, or 4 CP based demand charges. 4 CP Tariffs are the standard for most of the major utilities in ERCOT and we examine here CenterPoint Energy’s Secondary > 10 kVa IDR tariff which includes several traditional monthly demand charges as well as a Transmission Cost Recovery Demand Charge based upon 4CP peak usage. In the Tariff Details screen we can view all demand charges including Transmission 4CP on the far-right bar of the bar chart:
The Opportunity Chart shows that the Demand portion of the bill makes up about one-third of the total bill, $238.06 of $898.27 in August 2021.
The detailed charges for all demand charges can be seen in the Calculation Details spreadsheet below with again the 4CP charge, peak demand, and CP dates on the far right in bold:
-Demand Charge w Ratchet
Utilities will often ensure some sort of protection of demand-based revenues by including essentially a “floor” on the level to which peak usage may drop in a given month when the determination of demand is made. The mechanism employed is typically a “ratchet” clause. An example of ratchet type language can be found below for Norwich Dept of Public Utilities C-EPGRC tariff:
DETERMINATION OF THE DEMAND REQUIREMENTS: The demand charge will be based on the greatest 15-minute KVA demand requirement within the current billing month measured by suitable demand metering devices or as otherwise determined by the Utility, but not less than 80% of the highest demand measured in the 11 months prior to the billing month, nor less than 100 KVA.
This Demand Charge can be shown in the Tariff Details section of the website shown here (it should be noted that the Demand Charge is quoted in kVa at $7.58/kVa and then grossed up to the $8.91765/kw rate shown using a power factor of .85 so as to be applied to the kw measurement):
As seen on the Opportunity Chart the singular Demand Chart totaled $267.52 in August 2021 and seen in the Calculation Details below as based upon the current monthly max usage of 24.169 kw.
Daily Demand Charges-
While not detailed here, suffice to say all variations of the demand charge types listed above my also be applied to a daily peak demand. Some of these variations are now being introduced in CAISO markets where solar and battery have high levels of penetration. In these instances, batteries in particular are incentivized to “flatten” load by assessing charges for peak demand typically above some threshold.