Demand Charge for households
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….“In reality, electric companies cost structure is better reflected by the three-part tariff system”
Electric Utilities rate reforms have attracted much attention around the world during the last few years. This is mostly thanks to new trends that have begun to challenge the existing business model of regulated electric companies. Some of the trends include declining costs of roof top solar technologies and adoption of policies and mandates that favor distributed renewable energy generation.
ALthough this is not directly applicable to the CEB, Energy efficiency (EE) programs have created an environment of flat or declining demand for electricity sales. However, the wide adoption of rooftop solar with net metering has created a vicious cycle of lost revenue, where utilities are losing revenue more than the avoided cost of generation. From my understanding, the CEB is not in favor of net metering? (or not?)
This document attempts to consider whether residential Demand Charges is a solution to these issues, while ensuring that renewable energy and EE programs have enough incentives within the current business model to reconcile all the stakeholders involved.
The principles… of modern rate designs were laid out by James Bonbright in 1961 in his classic analysis “Principles of Public Utility Rates,” and in Garfield and Lovejoy’s 1964 classic “Public Utility Economics” (Lazar & Gonzalez, 2015).
….James Bonbright considers the role of electric utility rates as instruments of economic control performing very specific functions. A historic decision which defined these functions was the case of Federal Power Commission (FPC) v. Hope Natural Gas Co., 320 U.S. 591 (1944). These functions as defined by the case are twofold:
- Capital attracting function and
2. Use rationing function.
These two principle have served utilities well in the 20th century. However, there is widespread consensus that regulators should move beyond these two functions to adopt more overarching principles in residential rate reforms. This is important in the light of disruptive challenges and different expectation from the industry. An attempt in this direction was suggested by the Regulatory Assistance Project. The principles they suggest are that Customers should pay for grid services and power supply in proportion to how much they use these services and how much power they use (to reflect the actuals costs of delivery power) and that customers who supply power to the grid should be fairly compensated for the full value of the power they supply.
What is the current rate structure?
The current residential electricity rate structure has a modest fixed monthly charge and a volumetric charge (cents-per-kilowatt-hour) charge. This gives more emphasis on the volumetric energy used. Some of the new options suggested are intended to better reflect the cost of generation and cost of delivering electricity by more accurately charging customers based on their use of the power grid infrastructure (Ryan Hledik, 2016). Thus the proposed system is a three-part tariff which would include a ‘Demand Charge’ based on a customer’s maximum instantaneous demand for electricity, which is measured in kilowatts as in Table 1.
Table 1: Sample Two-Part and Three-Part Tariff Rates (Ryan Hledik, 2016)
In reality, electric companies cost structure is better reflected by the three-part tariff system. The costs of connecting a household to the grid in wiring, metering and other costs is reflected in the fixed charge. Volumetric charge is reflective of actually cost of energy generated. The Demand Charge is a reflection of how electric companies have to maintain and design the full system of Transmission. Distribution and Generation so that the system can accommodate the highest demand from a customer. Utility should be compensated for maintain that system at all times without rationing energy supplies to customers. This is especially true for residential customers with rooftop solar where much of their household energy demand happens when the sun goes down. But sometime they will not pay anything to the CEB (because of net metering) despite them using electricity from the grid when it is most expensive to generate. And the CEB has to maintain enough grid capacity to supply electricity for this house, and keep bearing this cost.
So what’s the downside?
This Three-part rate system has raised concerns that the Demand Charge will make energy efficiency and renewable energy mandates less attractive. As suggested in Table 1, residential customers are less sensitive to volumetric price in a Three-part rate structure than before. Energy efficiency (EE) programs are threatened because the price sensitivity to volumetric sales are reduced in a three-part tariff and residential customers who have already invested in rooftop solar are demanding that current volumetric prices be grandfathered into their bills. This is since the three-part tariff would make their investments in EE and RE less attractive and sometimes even financially unviable during the lifetime of their investments, such as that of a rooftop solar system. But to analyses the problem, one has to closely look into the objectives of the EE and RE targets set by legislatures.
Can we achieve Energy Efficiency at the Systemic level?
Energy efficiency means using less energy to use the same service or output. According to the Department of Energy, “Energy efficiency is one of the easiest and most cost effective ways to combat climate change, clean the air we breathe, improve the competitiveness of our businesses and reduce energy costs for consumers” (The Department of Energy , 2018). A positive systemic outcome of a Demand Charge would be that residential customers would be incentivized to seek measures to reduce their peak demand. Such an incentive makes financial viability for new technologies such as residential battery storage and implementing demand management systems.
The accumulated total reduction or slowing down system peak demand growth would relax utility infrastructure investments in deferred investments in all the T&D and generation infrastructure. Few examples are: foregone investments in expensive and high emissions Peaker plants, expensive grid substation expansions, feeder capacity improvements and transmission capacity expansions. Apart from the metals and materials savings, the emissions savings in peaking gas turbines has to be taken into account. The eGrid 2016 emission data published by the Environmental Protection Agency (EPA) has clear data how non-baseload emissions rate is higher than average emissions per MWh of energy produced. I beleive this is also true for Sri Lanka and the CEB.
For example, CO2 emissions from WECC Northwest grid sub-region increases over 230% to produce 1 MWh of non-baseload output energy in contrast to the emission released produce 1 MWh of energy on average in that grid sub-region (U.S. Environmental Protection Agency , 2018).
EE standards should be incorporated to value and monetize such foregone expensive investments and emissions saved. Those savings can be used to create a fund for EE and RE incentives/ rebates. Since the success of this fund would depend upon the success of Demand Charges, all stakeholders will positively promote its implementation.
Furthermore, electrification of Transportation, Space Heating and Water Heating has to be considered in the context of Environmentally Beneficial Electrification (BE). This is a term defined by Ken Colburn, Jim Lazar and Keith Dennis from the National Rural Electric Cooperative Association (NRECA). The concept is electrification of energy end uses that have been powered by fossil fuels, in order to reduce overall greenhouse gas emissions (Dennis, Colburn, & Lazar, 2016). For an island nation like Sri Lanka, this means shifting demand away from imported fossile fuels to domestic energy resources.
Electrification is considered to be an important step in deep-decarbonization of transportation and other heating functions. The paper questions whether reduced electricity consumption is the optimal metric to which to analyze the success of Energy Efficiency (EE) programs and that the path to a low carbon future should be substitution of fossil fuels for cleaner electricity. To that end, the paper suggests that in some cases electricity consumption can rise and metrics and accounting methodologies to value EE programs should be routinely revisited and updated and maximize gains.
I argue that properly incentivize BE programs has the added advantage of reducing rates for all electricity customers in the grid region as a well-managed electrification program will ideally increase electricity sales, driving down fixed cost per kWh unit sold. This will happen if increase in demand from Beneficial Electrification does not contribute to increase in system peak and growth is shifted away to low-electricity demand times of the day. The Demand Charge can be an instrument to achieve this price signal. It is possible that some of that pressure to reduce rates can be captured into a community fund and distributed to incentivize EE programs and subsidize RE programs.
As indicated in figure 2, by switching to an electric vehicle from a petrol car, one can save a significant cost to the Sri Lankan economy per vehicle during the lifetime of a vehicle under the condition of Sri Lanka’s economy in 2019. With better policies this can be even more.
In essence, a Demand Charge for households can improve the financial health of the Ceylon Electricity Board (CEB) by properly giving value to the services they provide by the grid. The cost savings and deferred investments can be monetized to a fund where EE programs and RE programs can be incentivized in the long run. The definition EE programs and RE programs should be expanded to incorporate system-wide reductions in emission and monetize the savings to financially support more programs creating a positive cycle of sustainable investments.
Works Cited
Biggar, D. R., & Hesamzadeh, M. R. (2014). The Economics of Electricity Markets. In The Smart Grid and Efficient Pricing of Distribution Networks. Wiley-IEEE Press.
Dennis, K., Colburn, K., & Lazar, J. (2016). Environmentally Beneficial Electrification: The Dawn of ‘Emissions Efficiency’. The Electricity Journal, 52–58.
EDF. (2017, Novermber 14). New Smart Meter Data Shows Potential of Real-Time Pricing to Lower Electric Bills. (Environmental Defense Fund ) Retrieved from EDF and CUB release comprehensive analysis of dynamic pricing benefits: https://www.edf.org/media/new-smart-meter-data-shows-potential-real-time-pricing-lower-electric-bills
Energy and Environmental Economics . (2014). California Transportation Electrification Assessment Phase 2: Grid Impacts .
EPRI. (2011). Estimating the Costs and Benefits of the Smart Grid A Preliminary Estimate of the Investment Requirements and the Resultant Benefits of a Fully Functioning Smart Grid. Palo Alto : Electric Power Research Institute .
Lazar, J., & Gonzalez, W. (2015). Smart Rate Design for a Smart Future. The Regulatory Assistance project.
Perera, D. (2015, 01 01). Smart grid powers up privacy worries. (Politico, Producer) Retrieved from https://www.politico.com/story/2015/01/energy-electricity-data-use-113901
Robert L. Graham, J. F. (2017). Challenges and Opportunities of Grid Modernization and Electric Transportation. U.S. Department of Energy .
Ryan Hledik, G. G. (2016, August 11). The distributional impacts of rsidential demand charges. The Electricity Journal , 29, 33–41.
The Department of Energy . (2018, May 7). Energy Efficiency. Retrieved from Department of Energy: https://www.energy.gov/science-innovation/energy-efficiency
U.S. Department of Energy . (2012). Operations and Maintenance Savings from Advanced Metering Infrastructure — Initial Results. U.S. Department of Energy , Office of Electricity Delivery and Energy Reliability . Retrieved from https://www.energy.gov/sites/prod/files/AMI_Savings_Dec2012Final.pdf
U.S. Environmental Protection Agency . (2018, February 15). eGrid Summary Tables 2016. Retrieved from Energy and the Environment : https://www.epa.gov/sites/production/files/2018-02/documents/egrid2016_summarytables.pdf