Due to the complexity of energy pricing, two identical buildings can consume the same amount of energy but have wildly different utility bills.
In life there are different names for the same thing but in the world of energy management, terms like energy, power, and electricity are not equivalent and interchangeable. To understand peak demand, we must first distinguish energy from power.
In simple terms energy is the capacity to do work. In terms of physics, work is the act of exerting force over a certain distance. Pushing around a boulder, lifting a box, carrying groceries up a flight of stairs; these are all examples of work and require energy to be done. Power is the rate at which work is done or the rate at which energy is transmitted to do work. As a customer of the utility energy is defined as how much electricity a building consumes during a certain period of time while power is the rate at which the electricity is consumed. Energy is measured in units of kilowatt-hours (kWh) and is typically billed to the customer as the total monthly amount of electrical energy that a building consumes. Power is measured in kilowatts (kW) and is typically billed as a penalty for the highest rate of electrical consumption. It is helpful to think of energy as kilowatt-hours and power as kilowatt-hours per hour, i.e. power is energy used per unit of time. When electrical devices are turned on, they consume massive amounts of energy for a fraction of a second leading to astronomically high power demand. It is for this reason that billed peak demand is averaged over larger portions of time, called “demand intervals.” Typical demand intervals range from 15 to 30 minutes.
To better visualize these two different metrics it is helpful to imagine a garden hose delivering water to a bucket. In this analogy power is the rate at which water flows into the bucket while energy is the total amount of water within the bucket. When it comes to delivering water to the bucket, there are two main variables that the supplier of the water must maintain:
Utility companies are tasked with providing enough energy over time, and meeting the instantaneous demand for energy. This is the reason why the two most significant charges on utility bills are power and energy.
Utility companies typically measure power as the average demand over 15 minutes. This is done by adding up the energy consumed and then dividing by the interval of time, giving units of power, kW. The highest average 15 minute period of demand over a month is known as peak demand. Peak demand can represent a large portion of your utility bill, depending on the rate structure of the utility company.
Utilities are tasked with attaching a cost to the service they provide. There are many different types of charges on a utility bill but the two that typically have the highest impact on cost to the customer are the energy charge (measured in kWh) and the demand charge (measured in kW). Utilities charge for energy consumed because it is directly related to the amount of fuel that the utility must consume in order to generate electrical energy. Utilities charge for kilowatts of demand because it is directly related to the maximum generation capacity the utility must have on reserve at all times. For residential energy consumers, there is no demand charge on the utility bill. Utility companies pass savings onto these customers because they typically have a flat energy consumption profile, leading to less pronounced peaks of demand.
This is not the case for commercial and industrial utility customers where there is a high amount of variability in energy consumption. This is why there is a separate demand charge for larger facilities and why this charge can be so high.
Utility companies join together to form regional transmission organizations (RTOs) which are tasked with the job of controlling and monitoring multi-state electrical grids. RTOs are very similar to independent system operators (ISOs) with the main difference being that ISOs are federally regulated and RTOs are an independent governing body which has greater responsibility for the physical transmission network. The remainder of this FAQ will refer to the vast group of independent system operators and regional transmissions organizations as the simply ISOs.
ISOs provide many benefits including more capacity to meet demand, better reliability across the grid, and optimized energy generation/transmission. This results in better wholesale pricing and transparent markets.
ISOs have networks of large power plants which generate energy efficiently and take care of the base load for a population of energy consumers. Since it is very difficult to store electrical energy efficiently on the utility scale, all of the energy on the grid must be generated, transmitted, and consumed immediately. As demand for energy increases, the ISOs must bring more power plants online, satisfying a demand for more electricity. Since these plants must be able to ramp up and down production very quickly, their cost to operate is higher than the larger plants which satisfy the base load of energy consumption. Due to the increased cost of meeting higher demand, utility companies must attach a charge that recoups more costs from customers who have the highest demand for energy.
If you’ve ever received and energy efficiency rebate from the utility, you may ask yourself “why would my utility company pay me to use less energy?” The answer is complex and has to do with ever increasing demand for energy. One of the largest problems for ISOs is maintaining enough capacity on the grid to meet demand. As population increases and more people are using energy, utilities must meet increasing demand by either building more power plants or getting customers to use less energy. Since it is extremely expensive to plan, permit, construct, and operate a new power plant (on the order of hundreds of millions of dollars) it is sometimes a more cost effective option to get utility customers to consume less energy. In the energy generation industry, incentivizing efficiency to avoid building expensive new plants is known as “avoided capacity cost.” In more regulated markets utility profits are decoupled from total energy consumed creating an artificial incentive for efficiency. It is for these reasons why utility companies encourage customers to use less.
The biggest factor that influences how many power plants a utility or an ISO must have on hand is peak demand. The annual highest instance of peak demand for a utility typically occurs in the summer months when outside temperature and cooling costs reach an upper limit. Rolling blackouts occur when there is not enough energy generation to meet demand, typically happen in the summertime and always coincide with the utility’s annual peak demand event.
Building operators know that peak demand charges can make up a huge portion of the overall utility bill. If a large facility consumes 500,000 kWh of energy in a month with an energy charge of 21 cents per kWh, then the charge for energy would be $105,000 for the month. In an ideal case where this building consumes a constant amount of energy at all times, the peak demand would be 694 kW. With a demand charge of $8.50 per kW the peak demand charge would be $5,903.
Unfortunately, this is not how buildings operate. For a typical building with occupants, HVAC systems, and electronic/mechanical equipment there is a high variability of demand throughout the day.
Let’s imagine the same scenario but with a building that has many peaks and valleys of power demand throughout the day. The building still consumes 500,000 kWh resulting in an energy charge of $105,000, but the building’s load profile is very high during the day, and very low at night when the building is unoccupied. The instance of peak demand occurs on a hot afternoon when all of the rooftop cooling units are running at full capacity, and all of the equipment in the building has been turned back on after lunch. At this time, the energy usage is 5 times higher than their average consumption, 3472 kW, leading to a demand charge of $29,514. This facility consumed just as much energy as the ideal case, but due to higher peak demand, received a bill that is $23,611 higher. This a highly exaggerated example but it illustrates the impact of peak demand. If left unaddressed, peak demand can be one of the biggest hits to your bottom line. There is good news: with the right techniques, it is possible to identify, diagnose, and fix issues that cause high peak demand charges.