clarkmaxwell / Creative Commons

Expansion of smart meters may enable ComEd to enact demand charges for all customers.

Move over, fixed fees — utilities see demand charges as revenue cure

Demand-based charges normally reserved for big industrial users could also be applied to residential customers if an Illinois utility gets its way in the state legislature.

Demand charges bill customers based on the maximum amount of electricity they use in one short time period during each billing cycle. The analogy of a pipe is often used – utilities say what matters is the width of the “pipe” needed for the highest volume of delivery at one moment, not the total volume over time.

Such charges have long been common for large industrial and commercial customers, and a number of utilities nationwide offer opt-in demand charges to residential customers.

ComEd, which serves northern Illinois, would be the first major utility to institute mandatory demand charges for all customers, if the legislation passes and is implemented as experts predict.

Utilities have described demand charges as a way to make sure that customers pay their fair share for the burden they place on the electric grid.

However, critics say that residential demand charges discourage energy conservation and efficiency and are a disincentive to installing solar. And they argue that demand charges can unfairly saddle customers who use little energy with high bills, based on infrequent usage spikes.

Consumer watchdogs and clean energy advocates are especially concerned that ComEd’s proposal is being made in the legislature rather than through rate-making before the Illinois Commerce Commission.

The demand charge was included last spring in legislation that ComEd backed, one of three major energy bills introduced in the state legislature. Experts expect that next year lawmakers will pass a bill that combines elements of ComEd’s bill; one backed by ComEd’s parent company Exelon, favoring nuclear energy; and the Clean Jobs Bill which would increase mandates for renewable energy.

The legislation would enable demand charges starting in January 2018. The charges are only practical when customers have smart meters, and ComEd’s smart meter roll-out isn’t scheduled for completion until the end of 2018. Critics say the demand charges could be forced on the public before there is an opportunity to study smart meter data that could help shape the charges and study how they might play out.

A growing trend

Nationwide at least 18 utilities offer opt-in residential demand charges, including Arizona Public Service, Georgia Power, Alabama Power, Duke Energy, and Xcel Energy in Colorado, according to an analysis by Ryan Hledik, an energy consumer economics expert at the Brattle Group. Hledik presented at a May conference in Denver focused specifically on residential demand charges.

The Salt River Project in Arizona is instituting a mandatory demand charge for all new customers with distributed generation, sparking a lawsuit from solar installer SolarCity. Nevada Energy and UNS Electric have made similar proposals, according to Hledik.

“I expect additional utilities to propose demand charges in the next six to 12 months, in some cases potentially making it a standard feature of the residential rate,” he said.

The legislation proposed by ComEd would give any Illinois utility with more than three million customers the power to institute demand-based charges. Ameren, which serves central and southern Illinois, would also qualify, though Ameren is at least a year behind ComEd in installing the smart meters necessary to implement demand charges.

Fidel Marquez, a ComEd senior vice president, described the demand charge as a way to more realistically charge customers for what they need from the grid.

“The costs of delivering electricity are driven by the demand that customers place on the system whenever they need it, and ComEd builds and maintains its delivery system – poles, wires and transformers – to handle everyone’s maximum demand for power,” he said. “The costs of this delivery system don’t change with the total amount of energy consumed.”

The legislation notes that ComEd would still bill customers through fixed charges and energy use charges. The demand charge is expected to make up about 25 percent of a customers’ total bill, or 58 percent of the delivery portion of the bill, although the final balance could change, according to a ComEd spokesman.

The legislation does not specify the time period upon which the demand charge would be calculated; a ComEd spokesman said it would likely be based on a half-hour interval.

A matter of inequity

Hledik said that in general, demand charges will cause some customers’ bills to rise, but people can lower their personal peak demand and their bills if they understand how the charges work and change their consumption habits accordingly.

“Demand charges provide customers with a financial incentive to consume electricity in a more efficient manner,” he said. “To an individual customer, reducing demand could be as simple as staggering the use of electricity-intensive appliances.”

Marquez described demand charges as a way to “correct inequities that can result in low-usage customers subsidizing high-usage customers.” Utilities nationwide have made a similar argument in favor of increased fixed rate charges, saying that people who lower their total monthly use through solar power are not paying their fair share to keep up the grid.

Critics of demand charges say that they are actually likely to have the most impact on residents who use smaller amounts of energy.

“If for 15 minutes you’re doing laundry and running air conditioning and someone’s using power tools at your house, your bill could be really high even if rest of the month you’re on vacation and not using any electricity,” said Rebecca Stanfield, vice president of policy and electricity markets for Solar City. “Big customers hire consultants and experts to help them manage around that charge. But it’s super confusing for typical residential customers, they’ll have a hard time figuring it out.”

Hledik noted that utilities can offer financial assistance or alternate rate plans for low-income customers to make sure they are not harmed by demand charges.

“There are many ways to design a demand charge, and the rate’s design can have a big influence on whose bills will change and by how much,” he said. “Analysis that carefully looks at different rate designs and the distribution of their impacts on customer bills, by customer segment, is an important part of any demand charge roll-out.”

A smarter charge?

Marquez described ComEd’s current billing structure as “a relic of a historical, vertically integrated energy system with antiquated analog metering.”

The smart meters being deployed across ComEd’s service territory give the utility and customers detailed information about exactly how much electricity they use and when. So theoretically people could avoid the kinds of spikes that would lead to high bills under a demand charge system, proponents argue.

“Demand-based rates will change the steps customers take to manage their delivery costs but do not eliminate their ability to do so,” said Marquez. “A customer’s demand would be reset to zero and re-measured each month, enabling a customer to change behavior and reduce delivery system charges.”

But critics of demand charges lament that one high spike each month could essentially wipe out the other measures consumers have taken to reduce electricity use or generate their own electricity with solar.

And unlike ComEd’s Peak Time Savings program or other programs that reward people for reducing energy use during regional peak demand times like hot summer afternoons, the demand charge for a given individual would kick in regardless of when their energy use spikes. In other words, a customer’s bill could be based on a usage spike at night even though there is plenty of electricity available and little congestion on the grid at that time.

For customers with solar, the demand charge could encourage them to use more electricity when their solar panels are generating – to help offset their highest demand rate. But this would be in the daytime when overall demand from the grid and power plants is highest.

“It’s not even lining up the customer’s peak with the utility’s peak [demand period],” said Stanfield. “It is pushing in the wrong direction in terms of price signal. This is really about locking people into high distribution charges no matter what their consumption pattern is.”

Impacts on solar

Demand charges are seen as a serious disincentive to customers installing distributed solar. Like increased fixed charges, they mean that total amount of energy used is not the prime determinant of an electric bill. So reducing electricity use on a daily basis thanks to a solar array or efficiency measures will not necessarily mean bill savings.

And demand charges that could vary greatly every month based on a customer’s different usage spikes make it hard to do the math predicting how long it will take to achieve savings equal to the cost of solar panels.

“It would be very difficult to demonstrate what the economics of a solar system or energy efficiency would be,” said Amy Heart, senior manager of public policy for Sunrun Inc. “How much energy would I save – who knows? What will my energy bill be? Who knows?”

Heart noted that someone might use relatively little energy from the grid all month thanks to solar panels, but if they decide to have a Super Bowl party with a large-screen TV and appliances running at a time that the solar panels aren’t generating, that one evening will determine their bill.

Devil in the details

By trying to implement the demand charge through legislation, Heart said, ComEd is “proposing this change without having to prove their math, without having to allow those conversations through the regulatory process.”

Dave Kolata, executive director of the Citizens Utility Board (CUB), sees some bright spots in ComEd’s proposed legislation, which also includes provisions for community solar, electric vehicles and energy efficiency. Kolata would generally like to see more emphasis on dynamic pricing including time-of-use (TOU) pricing, including by expanding programs that the utility already has in place.

He thinks it’s possible demand charges could be part of a smarter pricing regime that could lead to energy savings, but “with demand charges, the devil’s in the details.”

“There may be some scenarios there that are workable, and a lot that aren’t,” he continued. “You’re talking about a fine needle that you need to thread.”

In the bigger picture, the demand charge proposal is in keeping with efforts by utility companies to protect revenue and respond to a new reality where distributed solar, smart meters and efficiency measures give customers more control over their energy use.

“We know at some point there will have to be a détente or compromise on these macro rate design issues, in every state,” Kolata said. “We’re hopeful we can reach agreement. At the end of the day it’s about efficiency, demand response, distributed energy resources. We need a policy framework that supports this, rewards this, and maximizes the potential of the smart grid. It won’t be easy.”

10 thoughts on “Move over, fixed fees — utilities see demand charges as revenue cure

  1. The good thing about adding ‘demand charges’ is that they will boost the just-starting battery market. To limit your demand charges, you can install a battery pack that will supply electricity when it senses that you are making a large demand on the grid. The battery pack will charge those batteries when rates are cheap and you are not using much electricity (night or day if you have solar PV).

  2. For a utility to even imply that this has anything to do with fairness to customers is ludicrous; it’s about profit. If they provide me with a system to manage electrical use then it’s not so bad. Who is going to shut off their water heater before turning on the stove? Who would remember every time? One nanosecond late and you incur the charge. You can already give the utility the ability to shut off your appliances to reduce peak use for a cost savings on your bill. They can just as easily turn them on at the wrong time for a fraction of a second to pad their income.

  3. All the electricity that Commonwealth Edison (ComEd) distributes to its residential customers is purchased by the Illinois Power Authority (IPA) for ComEd to sell under the ComEd brand name. ComEd will not receive any additional income from these new demand charges; it does not have any generating plants. The demand payments will be passed on to the power generators. The IPA buys this electricity from various electric generators/wholesalers that might include Integrys Energy Services and Constellation (the power generating divisions of Exelon, the owner (parent) of ComEd). I do not know why all the retail residential electricity that is distributed by ComEd but purchased and owned by the IPA is not sold under the IPA brand name.

    • Sorry Michael, but these are delivery charges not generation. While it is possible to also have different generation rates during, peak, off-peak, and shoulder periods, this is clearly a distribution rate. It is not paid to generators.

  4. Read the .pdf file “disruptivechallenges.pdf” from the Edison Electric Institute website.
    This document explains the electric utilities’ behavior.
    I was talking to a City Planning man and his assistant the other day.
    Imagine my surprise when the City Planner told me “The electric utilities are simply toast.”
    The reason for all of the “Fixed Charge” raise attempts, now the “Demand Charge” came from that one document.
    In short, the investor owned electric utilities predict they will be gone in 30 years or less due to “distributed generation”(solar PV and small wind turbines in areas where wind is sufficient) with battery storage added. And they predict the batteries for this will be here in 5 years or so. Low enough cost, long enough life,technical characteristics satisfactory for solar storage.
    All of the battery developments are being driven by the national need for battery/electric vehicles.
    IF, I repeat IF, the electric utilities will innovate, drastically change the way they do business, they still have a role to play in our energy future.
    For now, the utilities are floundering around, attempting to use what they have in the past, to stave off the inevitable. They are not innovating.
    The utilities will become ever more desperate, attempting far more drastic measures, and in doing so will accelerate the massive “grid defection” they fear a lot sooner.
    They have to innovate, or die. Their choice!

    • I strongly disagree that the utilities are toast. Very few customers will ever be able to leave the grid entirely. Not unless they have some super redundant and reliable backup system that provides 100% service 24/7. That is very expensive, something the average customer will never afford.

      Those who go on solar or a fuel cell and use the utility’s grid to interconnect and buy or sell power will be charged for it. The more costs renewables put on the utilities the higher their fixed costs should be.

  5. Some discussion in this article seems to exclude consideration that Time Of Use (TOU) would be a factor in the demand charge. High demand charges should not be active during low-peak demand time, e.g., when residential customers at midnight are recharging an electric vehicle or doing laundry, etc. (Utilities might find high demand times fluctuating: e.g., growing customer overnight usage recharging electric vehicles. Would there be some feedback to the customer meter when usage has crossed a high demand threshold, so some cut-back could be implemented by the customer meter or manually?)

    Also, the article omits specifics whether (smart) metering would calculate the usage volume for the high demand charge. This reader gets the impression that the spike would put the usage over a threshold where some fixed surcharge would apply. Three seconds spike vs thirty minutes usage at peak should not be equal in the equation.

    Any high demand charge proposal should include TOU and metering of demand usage above a negotiated* threshold, or else demand charges should not even be on the table.

    * State utilities commission’s involvement here.
    Layman’s opinion,

    • “High demand charges should not be active during low-peak demand time, e.g., when residential customers at midnight are recharging an electric vehicle or doing laundry, etc.”
      I’m not sure that follows; if that were in place, *everyone* would run the dryer and charge the EV during that time period, and the exact same problem applies as if that peak demand were happening during the day – the equipment to deliver it to your home must still be sized appropriately, no matter the hour.
      Hm, perhaps utilities could design rotating demand times to sign up for, in order to stagger it between customers willing to shift this way or that?

      • 1) Agreed. Shifts in high demand times can be expected from new patterns of consumption associated with electric vehicles, use of solar, extreme weather, and the like, which is why I asked (above) that utilities would provide feedback to the smart meter when a volume threshold has been crossed (and I include when usage is approaching that threshold). 2) So, if the meter is so smart, it could apportion electricity to appliances during peak demand, giving priority to your TV during game day, putting some appliances at a lower operating level (akin to battery saver mode on your phone), while just delaying any usage to appliances you program at a lower priority – thus, putting your usage volume under the threshold for a demand charge, or at least at less of a high demand volume? The meter could have memory (cookies), for instance, of peak demand times from previous peak trends (Sunday game days) that would signal (anticipate) peak demand and put the meter on alert to get dishes washed, etc., prior to the kick-off (even if you are not planning to watch the game). Some manual scheduling of the smart meter would be required by the customer that would supplement the meter pinging the status of particular appliances. And the customer could be prompted for input through their phone: “Do you want pizza? Is it in oven now? I will starting baking at your prompt. Your scheduled event starts in 45 minutes.” Appliance manufactures would find sales incentives to provide programming in their products to facilitate meters interacting with appliances. Some estimates of customer participation will be overly optimistic which is the reason the meter would be relied on to keep the customer under the demand charge threshold. An remember, customers are already getting metered for the electricity, just not at a higher peak demand rate.

        (Sorry to beat this horse, but just trying to get him out of the starting gate.) lp