Lower Electric Bills - Clean Energy Group

LOWER ELECTRIC BILLS: REDUCING DEMAND CHARGES

“Every day we speak to school districts, municipalities, and other companies who face increasing costs in their utility bills. Traditional efficiency cost cutting measures including solar and LED lighting can only reduce a bill by so much. Energy storage directly addresses the demand charge problem so many organizations face.” Vic Shao, Chairman, ENGIE Storage¹

Millions of commercial customers across a multitude of states have the potential to lower their electricity bills with battery storage, but few established behind-the-meter markets currently exist. As with expanding solar markets, the economic opportunities for storage must be paired with supportive policies and programs to establish thriving markets and ensure that all customers are able to tap into the cost-saving benefits of battery storage.

Updated July 2018.

Issues

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).

Opportunities and Challenges

Several studies have explored the economic case for BTM storage as a demand management solution for commercial customers.

An analysis of rate structures across 51 utilities performed by GTM Research concluded that storage begins to be a cost-effective demand management strategy at a demand charge rate of at least $15 per kilowatt (8). Based on GTM estimates, the demand charge threshold for storage could drop as low as $11 per kilowatt by 2021.

Analysis by McKinsey & Company found even more favorable opportunities for energy storage (9). The consulting firm determined that some customers could break even by investing in battery storage at a demand charge rate of about $9 per kilowatt.

By 2020, McKinsey believes storage could be an economically viable demand reduction strategy at demand charge rates of as little as $4 to $5 per kilowatt, which would include most commercial rates, and some residential rates, in the U.S. with a demand component.

These numbers show a huge market potential for BTM storage across the United States. Clean Energy Group confirmed this potential in a first of its kind study with the National Renewable Energy Laboratory (NREL). Based on a survey of over 10,000 utility tariffs in 48 states, the NREL/CEG study concluded that more than a quarter of U.S. commercial customers may be eligible for utility tariffs with demand charges of $15 per kilowatt or higher (10).

That means that over five million commercial customers across the country may be able to cost-effectively reduce their utility bills with battery storage technologies today. This represents not just businesses, but nonprofits, public facilities, and multifamily housing as well. So far, only a small a small portion of this potential market has been realized, with no more than a few thousand commercial systems deployed.

While the survey found opportunities for demand charge savings with batteries across the country, most of the BTM storage systems installed for demand charge reduction have been concentrated in California. This is not just due to the state’s high demand charges. In fact, the analysis determined that economic opportunities for storage exist in states across all regions of the country including the Midwest, Mid-Atlantic, Southwest, and Southeast.

For example, along with energy storage leaders like California, New York, and Massachusetts, tens of thousands of commercial customers in Georgia, Alabama, Colorado, Kentucky, Michigan, Texas, Minnesota, and Ohio may be subject to utility tariffs with sufficiently high demand charges to make storage a viable economic investment. Figure 5 provides an overview of locations in the U.S. where commercial customers are facing high utility demand charges.

In other words, there is a future for clean energy with storage in states and regions that are not now considered clean energy leaders. Storage might be the enabling technology that could drive bill reductions and make renewable projects more economical to pursue in these markets. Anticipated future declines in battery storage costs will continue to enlarge the market potential in these and other states.

Despite these opportunities, there are skeptics who challenge the reason why advocates should get behind efforts to use storage to reduce demand charges. These advocates are not necessarily against storage but, instead, see demand charges as an inefficient way for utilities to recover and bill customers for peak demand-related expenses. As a result, they view storage deployed for customer demand charge reduction as an inefficient way to reduce system demand.

A few responses to this are worth considering.

First, we take the utility world as it is right now and, like the companies already deploying storage, we advocate for cost-effective clean energy technologies that have market opportunities to capture today. That seems a smart advocacy strategy even if there are opportunities for different, more efficient rate design structures to advocate for and evolve over time.

Second, there is little proof that the current rate design structure in favor of demand charges is going away any time soon. In fact, a recent rate case in Massachusetts expanded the use of demand charges to more commercial customers and to residential customers with solar, an undeniable trend pressed by many other utilities across the country (11).

And third, changes proposed by many utility rate reduction advocates include more time-of-use energy charges, which also favor the use of storage for cost savings over time.

For all these reasons, advocating for storage to reduce billions of dollars of utility demand charges is a pragmatic and potentially hugely successful enterprise for clean energy advocates to pursue.

Actions

New market opportunities for BTM storage must be further investigated and verified. The survey of utility rate tariffs represents a critical first step in expanding and establishing markets in new regions; however, actual investment decisions will ultimately depend on building-specific energy usage profiles and other detailed, customer-specific information.

More work is needed to determine how many customers are subscribed to utility tariffs with significant demand charges and which of those customers use energy in a way that would allow storage to economically reduce demand. This on-the-groundwork will require partnerships with local organizations and commercial customers interested in pursuing BTM storage solutions.

To accurately determine the economics of BTM battery storage, building owners and managers must have access to their property’s detailed energy usage history. Detailed interval usage data is a key component in determining the cost-effectiveness of battery storage for demand charge reduction.

Unfortunately, many owners and managers have access to no more information than what they see on their monthly utility bills. This is often because, despite being billed for demand, many facilities are not equipped with smart meters that track and record customer energy usage at the level required for storage cost savings analysis. Even for those buildings that do have meters tracking interval-level demand, getting access to that data can be a frustrating and time-consuming process, as not all utilities are required or willing to readily share access to this data. And paying for utility meter upgrades or energy data loggers can be prohibitively expensive for many organizations.

The Green Button initiative is a good example of expanding customer access to utility data (12). This type of open access needs to be implemented for any customer subject to demand charges. It seems common sense that, if a customer is paying for demand, they should have easy access to information that can help them reduce their demand. Utilities should be required to track interval-level energy usage for any customer on a demand or time-of-use rate; and they should have a simple, free or low-cost process for customers to access that data. In cases where this is not feasible, government support should provide funding for implementation of data loggers to track usage, particularly for public facilities and those serving low-income and vulnerable communities.

State policies, programs, and regulations must be put into place to facilitate market uptake. The reason California has the most established commercial BTM storage market in the U.S. is largely due to enabling policies and programs that have allowed the use of battery storage to mitigate the state’s high demand charges. Targeted state policies have accelerated the market uptake of storage built on a foundation of basic utility bill reduction economics. The state has taken three key policy actions to boost its BTM storage market:

Incentives: California has incorporated energy storage into its behind-the-meter distributed energy resources incentive program, the Self-Generation Incentive Program (SGIP). To date, the program has provided funding to more than a thousand commercial BTM storage projects. State regulators have also established an equity budget within the program, devoting 25 percent of remaining SGIP funding for projects located in low-income and disadvantaged communities (13).
Balanced mandate: California has taken a balanced approach in its utility energy storage procurement mandate, requiring that a minimum percentage of storage procurements be met by BTM systems. This balanced approach ensures that customers benefit from the mandate by limiting market saturation by large utility-owned projects sited on the transmission and distribution grid. More than 40 percent of California’s energy storage capacity is now located behind-the-meter, which, due to the excellent economic potential of BTM storage, is even higher than the policy stipulations require (14).
NEM inclusion: California regulators have enacted rules clearly stating that energy storage can be paired with solar systems participating in net energy metering (NEM) and laying out allowable configurations for NEM solar+storage systems. This level of clarity is essential to create fair and consistent market rules across multiple utility territories (15).

Similar types of policy actions will need to be implemented in other states looking to cultivate emerging BTM storage market opportunities.

Individual, third-party, or aggregated BTM battery storage systems should have the same access to participate in utility and regional grid electricity market opportunities as traditional grid resources and larger utility-scale systems.

Lack of market structures and outdated participation rules currently inhibit BTM storage systems from providing many grid services. Changes will need to be enacted at both the utility and regional grid operator levels to allow for BTM storage to tap into these additional revenue streams.

Works Cited

(1) Press release, “Five Million Commercial Customers Could Cut Costs with Battery Storage,” Clean Energy Group, August 24, 2017, www.cleanegroup.org/wp-content/uploads/demand-charge-PR-8.24.17.pdf.

(2) For more information on demand charges, see “An Introduction to Demand Charges,” Clean Energy Group, August 24, 2017, www.cleanegroup.org/ceg-resources/resource/demand-charge-fact-sheet.

(3) While this is the stated rationale in utility ratemaking, in conversations with industry experts it has become clear that there seems to be little correlation between the level of demand charges imposed by a utility and that utility’s specific investments in transmission, distribution, and capacity. indeed, neighboring utilities in the same state often have wildly differing levels of demand charges for similar customer classes. How a utility splits their charges between energy and demand components appears to be more of a result of legacy ratemaking issues than the relative components of their system investments. This apparent arbitrariness in no way negates the widespread prevalence of significant demand charges in many utility service territories across all parts of the United States.

(4) Shear, Timothy, “Peak-to-Average Electricity Demand Ratio Rising in New England and Many Other U.S. Regions,” U.S. Energy Information Administration, February 18, 2014, http://www.eia.gov/todayinenergy/detail.php?id=15051.

(5) Eller, Alex and William Tokash, “The Benefits of Solar + Storage for Commercial Public Buildings,” Navigant Research, December 5, 2016, www.greencharge.net/the-benefits-of-solar-plus-storage-for-commercial-and-public-buildings.

(6) Darghouth, Naïm, et al, “Exploring Demand Charge Savings from Commercial Solar,” Lawrence Berkeley National Laboratory, July 2017, https://emp.lbl.gov/publications/exploring-demand-charge-savings-0.

(7) None of this is to suggest or take a position that demand charges are inherently good or bad utility ratemaking policy. Our advocacy takes the utility rate structure as it is, not as we wish it to be. Strategies to reduce demand charges with storage are appropriate now and are likely to be effective for some time to come. Demand charges are historically embedded in utility rates across the country. That might change over time. But until it does, storage technologies will serve as an effective strategy to reduce demand charges and provide customers with economic benefits—attacking current demand charges is the basis for much of the behind-the-meter storage market that exists today throughout the country. Not focusing on storage because it reduces existing utility demand charges that some advocates and energy experts don’t see as optimal rate-making is odd strategy. It’s like saying it’s counterproductive to use energy efficiency to reduce utility rates that are artificially inflated or suspect. It ignores today’s reality. Also, the cumulative effect of customer level peak reduction will grow over time to reduce system peaks, with the attendant economic and environmental benefits from reducing inefficient, overbuilt energy systems.

(8) Munsell, Mike, “Commercial Energy Storage Economics Will Be Attractive in 19 US State Markets by 2021,” Greentech Media, July 13, 2016, www.greentechmedia.com/articles/read/commercial-energy-storage-economics-will-be-attractive-in-19-us-state-marke.

(9) D’Aprile, Paolo, John Newman, and Dickon Pinner, “The New Economics of Energy Storage,” McKinsey & Company, August 2016, www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/the-new-economics-of-energy-storage.

(10) McLaren, Joyce and Seth Mullendore, “Identifying Potential Markets for Behind-the-Meter Battery Energy Storage: A Survey of U.S. Demand Charges,” National Renewable Energy Laboratory and Clean Energy Group, August 24, 2017, www.cleanegroup.org/ceg-resources/resource/nrel-demand-charges-storage-market.

(11) Serreze, Mary C, “Mass DPU OKs New ‘Demand Charge’ On Residential Solar Customers in Eversource Territory,” MassLive, January 11, 2018, www.masslive.com/news/index.ssf/2018/01/eversource_criticized_for_new.html.

(12) Green Button Data, www.greenbuttondata.org.

(13) California Public Utilities Commission, “Self-Generation Incentive Program,” www.cpuc.ca.gov/sgip.

(14) California Public Utilities Commission, “Proposed Decision of Commissioner Peterman on Decision Adopting Energy Storage Procurement Framework and Design Program,” September 23, 2013, http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M078/K929/78929853.pdf.

(15) California Public Utilities Commission, “Decision Regarding Net Energy Metering Interconnection Eligibility for Storage Devices Paired with Net Energy Metering Generation Facilities,” Decision May 15, 2014, http://docs.cpuc.ca.gov/publisheddocs/published/g000/m091/k251/91251428.pdf.

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