The latest electricity sales data and forecasts from the U.S. Energy Information Administration (EIA) are just the latest indicator that energy efficiency works. Even as the economy ticked up (albeit, moderately) over the last year, electricity sales have declined, falling 2.3 percent in April 2016 over 2015. Even more important, the EIA anticipates per capita energy intensity to remain flat or decline between now and 2040, meaning utility sales growth will largely depend on population growth. While this sounds like good news for consumers, it is beginning to put electric utilities in a tight space. As a result, some companies are moving to add a new line item to consumers’ bills.
Most electric utilities don’t make money on the kilowatt-hours (kWh) of electricity they sell, although those sales help keep generating stations running for utilities that own such assets. In most cases, fuel charges are passed directly on to consumers; the utility receives no added margin. Instead, utilities recoup their costs, along with their guaranteed rate of return on assets, under line items that might read “distribution services” or something similar. Each state’s utility commission sets this per-kilowatt-hour charge at a rate it believes will support the upkeep of lines and substations and provide a reasonable return to utility shareholders.
This arrangement is beginning to put electric utilities in the same position as the nation’s gas-tax-financed highway system. As utilities sell fewer kilowatt-hours, they either have to raise their fixed connection fees or come up with a new way to place the burden of supporting the distribution system on customers. This is a problem that first emerged as net metering for rooftop solar generation and became a mandate in many states. However, while solar-panel owners are still a minority of utility customers, decreased consumption is an issue across all utility customer classes.
Chicago’s ComEd, Arizona Public Service, Dominion in North Carolina and Virginia, and Georgia Power are among a number of prominent utilities with proposals or actual plans in place (typically voluntary opt-in rate structures) that factor demand into monthly customer bills, not just consumption. Demand, in this case, means the amount of electricity in kilowatts (kW) a home is drawing at any given time. These new plans add a per-kW charge to participants’ bills based on either the 30-minute period of highest use in the month or the highest use during a defined utility-peak period. In return, these customers typically pay a lower per-kWh charge on their total consumption through the month.
Demand charges are seen as a fairer approach to rate design than raising the fixed charge most customers pay to connect to the grid. Raising this charge may disproportionately impact lower-income customers, and it doesn’t provide any kind of pricing signal that reflects the higher costs utilities pay to prepare for peak-demand conditions.
Unlike some utility business decisions that only affect large electrical contractors (ECs)—such as new transmission-line technologies or the need to replace aging substations—a shift to demand charges on residential rates could mean a boost in the fortunes of even the smallest companies. The 2016 Profile of the Electrical Contractor notes that EC firms with one to four employees earned 57 percent of their revenues from residential work. Over time, demand charges could spur a number of homeowner upgrades.
Homeowners with photovoltaic (PV) panels on their roofs would see the biggest short-term impact from new rates, because electricity demand typically peaks just as rooftop production slows down. Suddenly, a battery-based storage system capable of reducing a home’s peak demand during limited periods could earn itself a much faster return on investment. In fact, Vermont’s Green Mountain Power already sees such value in home-based storage for reducing system peaks that the utility is subsidizing the equipment for customers that allow it access to the stored energy during high-demand periods.
Consumers without PV panels also would feel a price pinch from high demand charges that could motivate investment in devices that help them to reduce and shift peak load. Smart thermostats are an obvious example, especially when paired with home air conditioning systems. Oklahoma Gas & Electric, for example, provides price signals to smart thermostats, shifting them back a few degrees to reduce peaks for homes and the utility grid.
Appliance makers are getting into the market, too. Whirlpool introduced a smart dryer that can be controlled by a Nest smart thermostat. It might seem an irrelevant upgrade, but in a demand charge environment, this feature can automatically shift one of the home’s major energy loads to off-peak periods.
Tackling an even bigger load-shifting opportunity, Rheem Manufacturing Co.’s EcoNet system allows Nest-based control of electric water heaters.
If demand charges become a new component of residential electricity bills, homeowners will gain new motivation to smarten up their homes. ECs aware of new rate programs and related technologies could see a shift of their own—to a range of new service offerings and prospective customers.