Why Storage? Part 4: Demand Charge Reduction

by Chris Rigatti

For our last post in this series, we'll look at peak demand charge management.  

While demand charges have been used for commercial and industrial customers for some time, they’re relatively new to residential customers.

Most residential energy bills in the US today include a fixed charge to cover the cost of maintaining the grid infrastructure, which is the same for every customer, and a variable charge based on the amount of energy (kilowatt hours, or kWh) used in a month which covers the cost of generating that energy at a power plant.   With peak demand charges, the fixed charge is replaced by a variable charge based on the maximum power (in kilowatts, or kW) that a customer uses in the month at any time. While this might seem like a penalty, it tends to be a good thing for the electricity system as a whole, because utilities need to invest in infrastructure to handle that peak power demand, even if it only occurs for a few minutes each month.  Peak demand charges are a way of passing the costs along to the customers that actually incur them.

To understand this a little better, let’s look at two hypothetical neighbors: Terry & Liam.

Terry is extremely eco-conscious: he has a 3kW solar array and has installed energy efficient appliances and lighting.  He has a home automation system that detects when he’s away from home and turns off lights and other appliances.  After subtracting the solar he generates, in a typical day he consumes about 15kWh of energy.  

image4-2.pngHowever, Terry also owns an electric car and a level 2 fast-charging station, and every night when he gets home he plugs in his car to top it off, flips on his 70” HDTV, cranks the volume on his 7.1 channel surround-sound home theater system, turns his A/C down to MAX FREEZE, and fires up his ultra power blender with a 5hp electric motor and blends up a tasty whey protein alfalfa flaxseed smoothie for dinner. (Ok, this is an extreme example, but bear with me...)  At that point, Terry’s house is drawing about 10kW of power from the grid, which is a lot for a home, but Terry doesn’t think about it since he’s so energy efficient in general, and most nights he shuts everything down after a half hour or so and heads out for a night on the town.

Liam, on the other hand, has an older home with a bunch of outdated, energy hungry appliances, and inefficient incandescent lighting.  He’s not very concerned about conserving energy, leaves his TV and stereo on constantly, and rarely turns the lights off when he leaves the house.  He has a pool (with an electric heater, naturally) that he keeps at a toasty 90 degrees year round in case he feels like taking a dip, and leaves his A/C set to 65 degrees so his house is cool and refreshing.  So, Liam is pretty wasteful, to say the least, and in a typical day his house uses about 50kWh— over 3x Terry’s usage, and about as much as you’d expect for a large home with a family of five. However, since his energy consumption is pretty constant throughout the day, he’s only ever using about 2kW of power at once.  
A home solar system in Australia. 

Now, clearly Terry is being more environmentally conscious than Liam.  But from the utility’s standpoint, if an army of Terry clones suddenly moved into the neighborhood, they’d have a problem: the grid isn’t equipped to handle such a large spread between peak and average power, and the utility would be forced to make some expensive equipment upgrades to cover that peak demand.  

As we said before, under a typical residential billing structure today, customers pay a variable charge based on the energy they use that month ($0.10/kWh, for instance) and a fixed fee to cover the cost of maintaining the grid infrastructure.  Liam’s monthly bills are naturally higher, because he uses over 3x more energy than Terry.  But in effect, he’s subsidizing Terry, as the utility’s cost for upgrading their equipment to cope with Terry’s huge peak power demand can’t be covered by his puny electricity bill alone.   

An illustration of how batteries can reduce demand charges. 

In reality, more and more homeowners have energy consumption patterns like Terry.  Peak demand charges can be a more fair way of balancing the true cost of serving these customers.  With a peak demand charge, the fixed monthly charge is replaced with a variable charge based on the highest peak power throughout the month.  This is billed in dollars per kilowatt, rather than kilowatt-hours— so Terry might pay $100 each month for his 10kW peak power demand (10kW * $10 per kilowatt charge) and Liam might only pay $20 (2kW * $10 per kilowatt).  

This may seem harsh for Terry, but there are steps he can take to avoid those peak charges— he could wait until after he finishes blending his smoothie to fire up his home theater, for example, or he could trickle charge his electric vehicle slowly overnight instead of fast charging it the moment he gets home.  

If he really wanted to minimize his peak power, he could install some batteries (you knew it was coming back there eventually, right?).  With batteries and an intelligent inverter, some battery capacity can be kept in reserve to cover big power spikes and smooth out the demand from the grid.  And of course, those batteries have other useful benefits, such backup power, PV self consumption, and time of use rate management. Peak demand charges are just one of many reasons why energy storage for homeowners is a big deal.

Read how homeowners in Perth, Australia are using a residential solar system to minimize their reliance on the grid with this free Project Spotlight. 

perth australia project spotlight

Topics: Solar, Residential

Written by
Chris Rigatti
Chris Rigatti is a Product Manager at Aquion Energy. He has over 10 years of experience bringing new technology products to market across a number of industries, including building automation, financial technology, and cloud computing.


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