Across the United States, an increasing number of residential properties are being exposed to the concept of demand charges. Demand charges do provide some opportunities to reduce your monthly bill but understanding how they work is a crucial element to accomplish that. What many don’t realize is that demand charges may make up to 30% of your residential electrical bill and up to 50% to 70% in commercial and industrial real estate.
The reason for the confusion is historically, demand charges were a feature of commercial billing rates, while most residential customers received “volumetric electric rates.” Volumetric electrical bills are made up of fixed and variable charges combined into a rate that you pay based on your consumption every month. When you hear people ask what the rate is per kilowatt, they are probably referring to volumetric electrical rates. You consume less, and you pay less; consume more, and you pay more.
The introduction of Demand Charges changes that paradigm. Instead of focusing solely on the amount of electricity consumed and monthly fixed fees, the customer is charged for both the consumption that is used (energy charge) and the demand charge, which is a fee based on the highest level of electricity used during a billing period (e.g., 15 minutes). To break it down further, every electrical appliance and device requires a certain amount of power to operate. When these devices actively consume electricity, the combined effect is the demand or need for electricity. It is the amount of energy that must be delivered to the consumer to satisfy the need. It is based on how much you need at any one time instead of the total amount you need throughout the billing period.
Why? To ensure that the grid has the capacity to provide electricity to everyone that needs it, they must have sufficient generation to meet the maximum demand of the grid at any given point in time. To satisfy this need, utilities typically balance this need through a series of agreements and specialized plants called Peaker Plants that provide additional capacity when needed to prevent a customer from experiencing a brownout or blackout. Peaker Plants and power agreements cost the utility additional funds to exercise. The Demand Charge is one strategy used to recover the extra expenses associated with providing enough peak demand power.
For the end consumer, this means merely reducing the amount of electricity used may not provide quite the savings expected. Because the demand charge is set based on your maximum energy consumption at a given point in time, the consumer must also focus on adjusting the amount of electricity they consume all at once. This was a little easier in a commercial building, especially with central plants and building automation systems. You simply program your equipment to start up staggered, pre-cool or pre-heat, and you shed loads based on schedules to reduce the amount of energy used at any given period of time.
For residential customers, this is a bit more challenging. Our systems tend to be decentralized, so we have less control over them. Residential customers also historically have less familiarity with what Demand Charges are, so they don’t understand how to manage them. This provides an excellent tenant engagement opportunity, by the way.
When the utility introduces demand charges to residential consumers, it can result in some experiencing bill increases. Typically, utility companies will build into the scheme a rate design that provides a path towards a meaningful bill savings opportunity. The utility company is attempting to reduce the amount of capacity they have to deliver by rewarding consumers who can reduce their peak usage. Often, they will also set up programs to assist the consumers in reducing their demand.
Typically, the only device controlling a home’s energy consumption is a thermostat. This is also the most logical place to start thinking about strategies to reduce peak capacity. The more data your thermostat can provide, the more effective it can be for this purpose. Smart thermostats are exceptional and, in some utility areas, can be programmed to allow the utility company to reduce energy consumption during peak demand periods. However, even without such a program, the thermostat can be a useful tool if programmed to reduce energy consumption during peak times. As a side note, smart water heater controls can interact with the utility company and shave load or be programmed to reduce heating during periods of high electrical consumption.
Our homes are not factories or commercial office buildings, so our use of electricity is different. Outside of our heating and cooling and potentially our water heating (if it is enabled with smart controls), most of our devices turn on (or use electricity) because we turn them on. So, turning on the dryer and taking a shower at the same time has the potential to spike your energy use. The key is ensuring that you do not turn on too many appliances all at once (to ensure a lower maximum monthly demand) or to shift power-intensive processes – like washing dishes or clothes – to off-peak periods when demand charges are lower or non-existent.
Outside of controls, a second strategy is the installation of solar panels. This allows you to eliminate using electricity from the grid (or offsetting it if net metered). While it does not address evening consumption if there is no storage, it allows you to shave demand during daylight hours effectively. There are several factors to consider for this strategy to be effective, including when your peak periods are in effect and the rates if net-metering is offered. If your peak consumption periods are in the morning before the sun is brightly shining or in the evening when the sun isn’t shining at all, this strategy may not be useful.
Another strategy involves understanding when peak periods are in effect and using those periods as times to reduce your energy consumption. A company called Flick makes a light switch cover that will illuminate red during peak periods and green during non-peak periods to provide a visual cue as to when you should be conserving and when you can consume electricity. The switch is red, hold off doing the laundry, it turns green, time to get it clean.
The smarter the home, the more connected the home, the more the opportunity to identify consumption and reduce it. Connected homes are the final strategy, similar to the commercial building with a building automation system; the smart home is programmed to shift load and identify potential demand issues.
Regardless of the strategy used to address demand charges, the key is understanding the demand and how it is calculated. Suppose the utility’s goal is to incentivize behavior, such as reducing electrical demand on the grid. In that case, this can only be achieved if the consumer understands what behavior is expected and what the reward is for that behavior. The more understandable the rate rules, the more effective the outcome.
Once you understand the rate rules, you must next understand your consumption of electricity. What appliances or devices use what loads? The US Energy Information Association provides some guidance on this. Their most recent survey is from 2015, the top 7:
- Air Conditioning (17%)
- Space Heating (15%)
- Water Heating (14%)
- Lighting (10%)
- Refrigerators 7%)
- TV’s and related entertainment devices (7%)
- Clothes Dryers (5%)
From this list, you can start to think about what devices you can control and what you cannot. Those that you can avoid running simultaneously or operating during periods that demand charges do not apply, if applicable, provide a path towards effectively reducing your demand charges. Demand is coming your way, to your multifamily property and most likely to single-family homes as well. The better your understanding of it, the more effectively you can respond.