From grocery stores to multifamily affordable housing to public schools, commercial customers small and large have embraced solar energy to cut energy costs and advance environmental goals. While a solar PV system can deliver significant savings by reducing a customer’s electricity consumption expenses, there is another, less well-known side to the energy cost equation—utility demand charges.
Unlike usage charges, which account for the amount (kilowatt-hours) of electricity consumed throughout a period, demand charges track the highest rate (kilowatts) of electricity consumption during a period. Essentially, electricity demand tracks the total amount of energy that is being consumed at a given time. The more devices using electricity at the same time, the higher the customer’s demand (2).
Demand charges generally serve as a way for utilities to recover the cost of maintaining enough generation, transmission, and distribution capacity to meet the highest electricity demand of all their customers (3). The charges are intended to cover the expense of utility investments in grid infrastructure such as transformers, substations, wires, and generation resources.
Historically, there has been a balance between electricity use and the need for these investments, with energy use growing at essentially the same rate as peak demand. However, in recent years, these trends have begun to diverge. Electricity consumption has remained stagnant or has been declining across the country, while peak demand has continued to steadily rise (4).
This means that a higher percentage of grid expenses are now going toward resources devoted to peak demand capacity that are used less and less. Largely because of this, demand charges have risen at a faster rate than electricity consumption charges for most commercial utility customers.
In California, which has some of the highest demand charge rates in the country, demand charges for customers with the state’s three big investor-owned utilities have increased at an annual rate of 8 percent to 17 percent over the last decade (5). By comparison, the state’s commercial electricity consumption rates rose at an average annual rate of less than three percent.
Both behind-the-meter (BTM) solar and energy storage technologies—those installed at a customer’s site—have the potential to reduce these demand charge expenses.
When a commercial customer’s peak demand consistently occurs during sunny daytime hours, solar may help reduce costs by lowering customer demand for utility power. However, because solar is an intermittent resource, a few clouds at the wrong time could wipe out demand savings for an entire billing period. Because of this, solar is not an effective way to reduce monthly utility demand charges, and customers cannot rely on solar alone for consistent demand charge savings (6).
Battery storage, on the other hand, can reliably deliver demand reductions throughout a billing cycle, ensuring demand charge savings through an effective demand management strategy. Battery storage can deliver these savings to a technological certainty. (See Figure 3.)
While nearly all medium to large commercial customers in every state are subject to demand charges, there remains a lack of customer understanding about how these charges are structured and a lack of transparency about the range of utility demand charge rates across the country.
This lack of customer understanding is especially unfortunate as demand charges often represent from anywhere between 30 percent to 70 percent of a monthly commercial electric bill. But it’s also understandable—until recently, no solutions were available to allow customers to act on that information. Now, with batteries, there is a technology that can be used to reduce demand and its related charges. Figure 4 details how battery storage can be used for peak demand management.
As technology development outstrips customer understanding of complex rate structures, the resulting knowledge gaps pose significant barriers, these occur not only to commercial customers seeking new ways to reduce energy costs, but also to the continued growth of the clean technology sector as companies increasingly offer integrated solutions like solar paired with battery storage.
Due to these barriers and the relatively recent opportunities to reduce demand charges with energy storage, there are currently few well established markets for BTM storage. As of today, BTM storage is still a nascent, but fast-growing market in only a few states in the country.
Without additional incentives to boost market growth and a balanced approach to battery storage development that encourages BTM installations, the market potential for these customer-benefiting systems may remain fragmented and underserved, as solar was a decade ago (7).