In Illinois energy bill drama, demand charge is central and evolving

As the Illinois legislature’s post-election November veto session approaches, clean energy advocates and other stakeholders say they are negotiating feverishly to come up with a new draft of a long-awaited energy bill.

While there are multiple contentious aspects of the bill, including a subsidy to keep the state’s nuclear plants running, the demand charge has been a major sticking point.

ComEd says charging customers based on their highest demand spikes is necessary to adequately cover the cost of keeping up the grid. Consumer groups and solar developers say the charge would raise bills unfairly for many customers, and chill distributed solar development.

During recent negotiations, ComEd has revised their proposal from the bill introduced in May, the Next Generation Energy Plan, backed by both the utility and its parent company Exelon. Legislators have reportedly signaled that the companies and clean energy advocates, who have introduced their own bill, must come up with a unified proposal. The demand charge is among the areas where ComEd has made concessions to opponents.

ComEd senior vice president of customer operations Val Jensen said the new proposed structure of the demand charge is meant to address fears about unfair and unpredictable bills based on isolated usage spikes. And he said the charge is necessary to cover the costs of delivering electricity to individual customers.

“The current pricing system based on kilowatt-hour consumption we don’t believe is an equitable way to charge customers,” Jensen said. “We are willing to consider alternatives to our original proposal so long as we’re able to maintain the principle that we move away from a volume-based charge to one based on demand.”

But some vocal critics of the demand charge say the concept is inherently faulty, and no degree of modifications will win them over.

Defining peak demand

In the bill introduced in May, ComEd proposes to base the demand charge on a customer’s single highest 30-minute period of energy use each month. Critics argued that this could mean bills based on a single evening when someone had a party or did a lot of laundry.

Jensen confirmed that ComEd’s current plan is to base the demand charge on a monthly average of customers’ 30-minute peak each day, during a window most recently set at 6 am to 10pm, though he said that window could change.

Jensen said the fear that once-a-month spikes would drive up bills under the previously-proposed structure is “something most people don’t need to worry about.” But “to the extent that it is driving the conversation, we’ll take it off the table, and focus on the core concept” of a demand charge, he said.

Critics of the demand charge say the new structure is a little better than the original proposal, but will still make it virtually impossible for customers to predict their bills or reduce their bills through conserving energy. And such unpredictability could be deadly for the solar market, some developers say, since customers would not be able to predict the payoff for solar installations, and their bills could be determined by usage spikes when the sun is not shining even if they generate lots of their own energy when it is.

Rebecca Stanfield, vice president of policy and electricity markets for SolarCity, said ComEd’s revised demand charge structure “helps prevent wildly different spikes and valleys, but it doesn’t address any of the other ways in which demand charges violate basic ratemaking principles.

“Imagine sitting down at the kitchen table and looking at your electric bill trying to decide should I invest in a new furnace, air conditioning, solar,” she said. “You have to be able to with basic math predict how it’s going to impact your bill. With demand charges you cannot do that, unless you know how many kilowatts each of your appliances use and you know exactly when you use them. It’s almost impossible.”

Whose peak?

Demand charge critics also argue that an individual’s peak demand does not mirror system-wide peak demand, and are therefore not a good way to reduce overall stress on the system or the need to run natural gas-fired peaker plants during peak demand times.

They say that time of use pricing, where customers are charged different rates based on system-wide demand, and other tools are much better options.

“You can change [the calculation of peak demand] hours one way or another, but the bottom line is mandating residential demand charges when there is no relationship between individual customers’ peak demand and the cost of the grid as a whole is an unnecessary move for the state,” said Amy Heart, director of public policy for the company SunRun. “This doesn’t make sense from a rate design perspective.”

Jensen countered that such concerns reveal a misunderstanding of the purpose of a demand charge. The demand charge was never meant to reduce system-wide peak demand, he said. Rather, it is meant to cover the utility’s costs for delivering electricity to individual consumers. The wires and other infrastructure leading to each house or business must be able to handle that customer’s peak demand whenever it happens, he explained.

In that sense it is more like a fixed charge, an existing part of most utility bills nationwide. In states including Wisconsin, utilities have sought greatly increased fixed charges as a way to offset lower energy demand and hence lower payments on the volumetric, per-kilowatt-hour parts of customers’ bills. Utilities have said such increased fixed charges are necessary given the proliferation or possible proliferation of distributed rooftop solar.

“[System-wide] peak demand is how we go out and purchase capacity to serve customers’ loads,” said Jensen. “But the costs of our distribution system are really driven by non-coincident peak demands…by building wires and poles.”

In the proposed legislation ComEd is actually proposing to lower its fixed charge. But critics say this is little consolation if the demand charge functions like a fixed charge, and an unpredictable one at that. Critics note that people will not be incentivized to reduce energy use, install solar or take any other action if they can’t see how it affects their bills.

Attorney General Lisa Madigan has spoken out against the demand charge for this and other reasons. “ComEd’s so-called demand rates proposal could unfairly result in consumers being charged more for using less electricity, needlessly taking away control and predictability in their bills,” she said in a statement to Midwest Energy News.

The latest version of the demand charge being negotiated actually includes three separate demand charges, Jensen explained. Bills have traditionally included distribution, transmission and capacity or generation components — separate fees meant to cover the generating of power, the transmission over long distances to population centers and the distribution within a utility’s service territory.

ComEd wants to move all of these facets to a demand charge model. The distribution demand charge would be based on the individual’s highest spike each day averaged over a month.

The capacity and transmission demand charges would be based on a customer’s highest usage within the five-day period wherein ComEd’s system as a whole has its highest demand. The regional transmission organization, PJM, which transmits electricity to ComEd’s grid would let the utility know each year which five days its demand was highest.

Customers would have no way to know when their capacity and transmission demand charges are being calculated. Critics say this furthers the level of unpredictably and lack of control for customers, making it even harder for them to install solar or take action to reduce their energy bills.

Jensen said that while it is a change, most customers won’t see a significant impact from the transmission and capacity demand charge and that it is a more fair way to charge customers.

Net metering and rebates

Linked to the demand charge, ComEd is also proposing to alter how it compensates customers with distributed solar. The bill would end net metering, and replace it with a one-time rebate of $1,000 per kilowatt for residential and $500 per kilowatt for commercial and industrial customers.

Solar developers and advocates oppose the end of net metering, which is widely considered crucial to a healthy solar market. Some also criticize the fact that ComEd would be able to recoup the costs of the rebates from ratepayers, since the rebate would be considered a “regulatory asset.”

“Instead of a solar owner getting the whole benefits of their solar installation, there is a rebate that doesn’t fully compensate the solar owner and maybe more importantly actually creates a cost shift to all ratepayers,” Heart said.

In order to receive the rebate, customers would also have to agree to let ComEd essentially have control over their smart inverters, which decide whether and how much power is sent to the grid from solar panels. Smart inverters that communicate with the utility and the grid are widely considered key to a smart grid; a way to reduce overall peak demand and increase system-wide efficiency. But some see the requirement as an incursion on customers’ rights.

Jensen said ComEd wants to see a robust solar market grow in Illinois, and thinks the rebate will help make that happen.

“The rebate I’ll acknowledge might not be the best for all solar companies depending on their business model,” Jensen said. “But the rebate is actually better economically from a customer’s perspective. Because with net metering you have to make assumptions about the future of energy prices. A rebate is money in hand right now, that’s worth a lot more on a present value basis than a stream of benefits over 20 years.”

Regulating through legislation?

With the demand charge, rebate and various other provisions proposed by ComEd, stakeholders generally agree that the devil is in the details and policies could play out in different ways depending on multiple factors.

For this reason, many clean energy and consumer advocates say, such provisions should go through ratemaking processes in front of the Illinois Commerce Commission, rather than being decided by lawmakers who are not experts in energy policy and who could be more subject to influence from donors or lobbyists.

The commerce commission has a set “adversarial process” wherein experts and stakeholders submit testimony and evidence. Legislation by contrast can tie the hands of the commission, the Attorney General and other official actors, by limiting their options.

“We’re looking at things like what should the measurement period [of peak demand] be,” said Patrick Bean, SolarCity deputy director of policy and electricity markets and pricing analyst. “That happens typically in a regulatory proceeding, where there is review, you assess whether it’s fair. This is a mandate on a large mass of customers without any research or pilot behind it. That’s one of the main concerns.”

The national picture

Demand charges have long been used for industrial customers, who have large amounts of energy delivered and have significant control over exactly how much they use and when.

But demand charges for residential customers are a relatively new and highly controversial idea. Demand charges have been proposed 12 times by investor-owned utilities and rejected by regulators or withdrawn by utilities in every case, in states including Kansas, Arkansas, California, South Dakota, Tennessee, Oklahoma, Texas and Iowa, according to an analysis by the solar company SunRun.

Commissions typically mandate higher levels of scrutiny than is mandated in passing legislation. Experts say ComEd is the first utility trying to institute a demand charge through legislation.

In Kentucky, the Attorney General intervened after the Glasgow Electric Plant Board instituted a demand charge that caused significant rate increases. In an August letter, Attorney General Andy Beshear said the charges “are so outrageous customers report going to extreme measures to avoid these excess charges, including traveling between work and home five or six times a day to adjust their thermostats or appliances, and elderly customers turning off their air conditioning and staying in their homes, even after temperatures reach 92 degrees; yet their bills continue to rise.”

Glasgow’s demand charge is based on a customer’s one-hour peak use per month. While Glasgow demanded EPB go back to its old rate structure, a new one was instituted as an alternative to the demand charge, with separate prices for on-peak and off-peak times.

In Arizona, the Salt River Project, a cooperative not subject to the utility commission, instituted a demand charge on all customers with solar. The SRP predicted customers would see a $50 increase per month in their bills, though the actual increase reportedly averaged $29 a month, which the SRP attributed to people changing their energy use behavior.

Nationwide, critics have argued that elderly and low-income people would be least able to change their energy use and most susceptible to bill increases resulting from demand charges.

On October 12, the consumer group Illinois PIRG circulated a letter opposing demand charges signed by elected officials and organizations representing black and Latino Chicago communities and retired and low-income people. The letter’s signers included the AARP, a long-time critic of demand charges, and Jesus “Chuy” Garcia, the popular county commissioner who forced Mayor Rahm Emanuel into an election run-off last year.

“As we make further strides in efficiency, and as distributed solar penetration rises, utilities are worried they have to maintain the same level of infrastructure while selling less and less electricity. That’s an understandable and real concern,” said Illinois PIRG director Abe Scarr.

“That they attempt to spin demand charges as ‘modern’ is ironic — this is a 19th century rate structure designed for industrial customers. Utilities are pretending it will move us forward when really it is an attempt to slow down the transformation of our power system.”

4 thoughts on “In Illinois energy bill drama, demand charge is central and evolving

  1. I’m wondering where Illinois’s famous Citizens Utility Board stands on this. I don’t see a mention in this story, and just now I could find nothing on the CUB web site.

  2. My thoughts are that fixed and predictable costs of maintaining the distribution system should be covered by fixed and predictable monthly charges. The time of day pricing for kwh will reflect the actual fuel and capacity markets.

  3. Solar deserves a little bit of chilling, since it has unfairly received so much subsidy that it has shifted the market in an unsustainable way.

  4. There is also a lot of information that demand-side management doesn’t work very well. It’s really hard to get people to change their habits. They usually just end up paying more for power.
    Yet, with intermittent sources like renewables with a stronger and stronger presence, it becomes harder and harder for utilities to manage the supply and demand match that’s necessary to run the grid. We should provide more early education on our infrastructure, specifically electrical supply, so more people could have an inkling of why this task (more renewables) will be so monumental. In California, we just got a report that says we will need to invest about 5 billion more in our grid to incorporate more renewables than we already have.