Demand Charges Change the Calculus
I think you will agree – most people don’t really understand how utility companies charge for electricity. That is doubly true of business owners and executives because businesses are often billed in more complicated ways than residential customers. It’s hard enough to understand bank charges and cell phone bills. Electricity billing is often a nebulous and confusing thing.
Demand charge significantly complicates how solar panels will affect your business electricity bill. More on that later, but first…
How Do Utility Companies Charge for Electricity?
Both FPL and LCEC charge customers for multiple aspects of electricity usage. For residential customers, the basic breakdown is:
- Customer Charge – the base fee for the privilege of being connected to the utility grid and having a utility meter.
- Usage Charge – Billed in kilowatt-hours, this is the quantity of electricity you use in terms of power over time. Usage charges are further broken down into base charges, fuel surcharges, and other fees. Nonetheless, these components are all based on the amount of energy you use – power over time.
- Taxes – Universally understood and loathed.
For some business customers, there is an additional charge called Demand Charge. While usage charges are based on energy usage, demand charge is based on power usage. Power is the instantaneous use of electricity – how fast you are consuming electricity rather than how much over time. Some businesses use a lot of power at times of day and little power at other times of the day. For example, your business may only run a manufacturing line during business hours.
Because the amount of power used can be very high, the utility company has to build out infrastructure to meet this demand, hence the term “demand charge.” They need to supply transformers, distribution lines, and energy generation to meet these demands. That is different from homes that have a fairly steady and small electricity usage (relatively speaking).
As a result, business customers on a demand charge tariff will pay for electricity differently. They pay a lower usage rate, but also pay a demand charge that is based on the highest amount of power required during the billing period (for example, the highest 30 minutes of power for FPL’s GSD-1 tariff). Essentially, you pay the demand charge for the highest 30-minute period of usage for a 30-day period, even if you have just one 30 minute spike in usage.
How Demand Charges Impact Solar Panel Savings
Whether you are a homeowner or a business owner, the output of a solar panel will produce the same amount of utility usage offset (reduction). You get all the same environmental benefits and all the same kilowatt-hour savings. However, remember that businesses pay a lower rate for usage, so their dollars-and-cents savings for usage are lower.
So the question is, how does solar panel production impact demand charges. That is very tricky and also much more unpredictable. The reduction in usage (energy) is easy to predict and quantify. The reduction in demand (power) is much harder to predict.
To model the reduction in demand charge we need to know how much demand you have on an hour-by-hour basis to determine when the peak demand occurs. Then we need to look at how likely it is that solar energy will offset demand at the same time. As you might imagine, this is really unpredictable because the instantaneous output of solar panels is highly dependent on weather. If your peak demand occurs at a time and day that happens to be very cloudy by chance, your demand charge reduction will be severely impacted.
And what happens if your peak demand is at night? Well, solar panels will have no impact on your demand charges whatsoever.
Predicting Demand Charge Savings
There are sophisticated models that allow us to predict how much demand charges will be reduced for your business. The models are not perfect, but they are good. Most importantly, it’s garbage in, garbage out. If we do not have good data, we can’t predict your savings.
Your utility company can provide detailed demand data in spreadsheet format for the last year. We can plug this hour-by-hour data into models to see how that coincides with solar panel production. If your demand peaks are in the afternoon, for example, it might be best to install solar panels facing west.
Predicting demand charge savings have a degree of risk and unknowns. There is no perfect way to do this. While the usage charge reductions should be rock-solid calculations, you should know that demand charge savings are not guaranteed and could change over time as your demand profile changes.
Business Solar Panels Investments
Ultimately, the savings provided by solar panels will provide a return on investment and a positive net present value for most business clients. But it is important to calculate and model the predicted savings to see how your demand charge reduction impacts financial results.
If you are presented with a proposal that does not take into account demand charge or your solar professional doesn’t mention it, be skeptical about the savings and financial model they provide. Hire a professional that understands the impact of demand charges on solar panel investments for business clients.