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Electric Charges Up Close

By Lindsay Audin - December 2003 - Energy Efficiency


Controlling the cost of electricity is more than just minimizing consumption. An understanding of the rates charged by utilities might uncover ways to cut costs that would never otherwise be obvious.

Most facility executives glance at monthly electric bills and, if they seem about right, pass them on to accounting departments for payment. Unfortunately, most examine bills using overly simplified techniques, such as calculating average cost per kilowatt-hour each month, that can mask errors in both billing and operations and can fail to show cost-cutting opportunities. It is important to remember that utilities are not required to charge the lowest rate, but merely an appropriate rate for a given type and size of organization.

Facility executives can avoid such traps by taking a couple of actions. First, learn exactly how facilities are being charged for electricity. Second, examine how facility operations interact with that billing system. An engineering consultant can help with the second step, but most facility executives can do the first part.

Getting Units Straight

To understand an electric bill, it’s important to first understand what electricity is. It’s a form of energy that can be converted into heat, light, motion and sound. The two most important ways to describe electricity’s use are how much is used and how quickly it is used, often called demand.

The standard unit to measure how much electricity used in a time period, such as one month, is kilowatt-hours (kwh). The standard unit to measure how fast it is being used at any moment, or the highest rate of use in a month, is the kilowatt (kw). Kilowatt-hours is analogous to miles; kilowatts is analogous to miles per hour. To relate them, understand that to consume 1 kwh in 1 hour means the facility is using electricity at an average rate of 1 kw.

These units are not interchangeable and using the wrong term can sometimes create confusion and cost a lot of money. People sometimes use the term “kilowatts” when they should be saying “kilowatt-hours.”

So what then are volts? Voltage is analogous to pressure. Think of low voltage, such as that from a battery, as a trickle of water and high voltage, such as the power in a building, as a blast from a fire hose.

All three units — kw, kwh and volts — plus a few others are involved in how much facilities pay for electricity.

Facility executives won’t likely find all these units or separate charges for them on electric bills. The real information on how facilities are charged resides instead in a utility’s rate regulations. Commonly called tariffs, these rates are set by regulatory bodies, such as state public utility commissions, power co-op boards or municipal power agencies, through hearings and negotiations with utilities. Electric bills are highly simplified versions of tariffs as applied to the monthly use of power.

It’s possible to download a copy of the tariff that applies to a facility’s electric account by going to the utility’s Web site. If the URL is unknown, a good place to look for it is at Scott Rubin’s Utility Home Page. That’s just one of several sites that maintain such links.

To figure out what tariff a facility is on, check the bill for the “service class,” which is often shown as an alphanumeric code, such as EL12A to indicate electric rate 12A. Tariffs are typically named by the type of facility, such as “large commercial,” and, within that group, by service class. Utility account representatives might also be able to provide a copy of a tariff and help explain its contents.

Typical Charges

It is common on many bills to see a “customer charge” that is a constant each month, regardless of how much electricity is used. Think of that as a membership fee. A facility is charged that amount as long as it is connected to the utility, even if it uses no electricity in a given month.

Under “usage,” find the monthly energy consumption in kwh, either as a lump number or possibly broken out during different parts of the day, such as on-peak or off-peak. The tariff defines the hours for each.

Another line item in the usage column might show demand in kw. If so, that is the highest rate of electric use in that month, usually averaged over a 15- or 30-minute period but never instantaneous. This is typically called the “peak demand” for that month.

These two components — energy and demand — are the basic parts of most commercial electric bills. Tariffs will show how much a facility is charged for on-peak and off-peak use in dollars per kwh and how much it is charged for peak demand in dollars per kw. The charges might vary with the amount of electricity used, with a basic block of power, such as the first 1,000 kwh being charged at one rate and all other kwh being charged at a lower rate. This is often called a “descending block” rate. Most electric rates also vary between seasons, so don’t be surprised if the average rate calculated from bills changes during the year.

To discourage exceptionally high demand spikes, some utilities assess a “ratchet” charge by levying a constant fee, based on an annual peak-demand level seen in an earlier month, for many months after it occurred. Such a charge may be based on a defined percent, such as 50 percent, of the peak demand seen during a 12-month period. It would then be added to the normal demand charge based on the actual kw occurring in each month, and continued for a year or more.

Energy and demand charges are composed of other rates that are related to the different services that go into providing power. Many tariffs, for example, show separate energy and demand charges for making the power (generation), conveying it through high-voltage lines (transmission), and stepping it down and sending it through local power lines (distribution).

Depending on the voltage at which facilities receive power, those rates may also vary. Many small- to medium-sized commercial facilities take power at 480 volts or less, which is commonly called “low tension.” But larger facilities, including malls, campuses and industrial plants, may take power at “high tension” — between 4,800 and 138,000 volts — and then step it down with their own transformers. In general, taking power at higher voltages means lower base electric rates because the utility is using less equipment to distribute the power. Some utilities may refer to the separate charges related to voltage as “primary distribution” for delivery greater than 480 volts and “secondary distribution” for delivery at or less than 480 volts.

The way electricity is delivered and the time of day it’s used might appear on electric bills under confusing acronyms such as “LOOP” (low-tension off-peak). Utility account representatives can translate such terminology. Tariffs may not do so.

Many utilities also charge for “power factor” (PF), which is an indicator of how power is pulled from the grid by the various devices in a building. A simple incandescent light bulb, for example, accepts power just as it is provided without altering the power sine wave form. It therefore has a power factor of 100 percent, or 1.00. Various magnetic-core devices, including magnetic ballasts in old fluorescent fixtures, and some solid-state systems, such as variable-speed drives, cause the power wave form to be distorted, lowering the power factor. That forces the utility to compensate through the use of additional equipment and energy. While most commercial buildings have overall power factors around 80 percent, dropping much below that amount may result in a higher power factor charge, shown in dollars per kilovolt-amp (kva). Do not confuse “power factor” with “load factor,” which is simply the ratio of the average demand in a month to that month’s peak demand. Utilities do not bill for load factor.

A variety of other charges may appear, depending on how the utility charges for power. There might be a “fuel adjustment charge,” possibly labeled “adjustment factor.” The base electric rates in tariffs are developed using an assumed cost of coal, oil, natural gas, uranium or other natural resource the utility uses to generate electricity that may not be valid at different times of the year or during an extreme hot or cold spell. To correct for that difference, utilities are allowed to pass through the extra cost via such adjustments. When the price of fuel drops significantly, the “adjustment factor” might be a negative number. The quantity seen is usually in cents per kwh, and the adjustment charge is usually already included in the total seen in the right hand column of the bill.

There might also be separate charges for extra meters or other equipment provided by the utility, such as backup distribution lines, at your firm’s request. These are typically flat, monthly fees.

Taxes And Hidden Charges

Some commercial customers try to calculate electric bills based solely on tariffs and come up with lower amounts than seen on the bill. They forget that local and state governments may levy charges not seen on either the bill or in the tariffs. While sales taxes are commonly seen as a separate line item on bills, gross receipts and utility taxes might have been added to the usage and demand charges without being broken out on the bill. In some states, utilities are barred from showing such taxes separately.

Where deregulation is involved, other charges might be built into rates. To pay off utility “stranded costs” — a charge that allows utilities to recover infrastructure investments — a competitive transition charge (CTC) or universal service fee may be added to each kwh consumed. While such fees may appear in tariffs, they might be in a different section covering temporary charges that run out by a set date rather than on the particular page dealing with rates.

In other cases, a small system benefit charge (SBC) may be added to each kwh to cover the cost of energy efficiency or research programs or to subsidize electric bills for low-income customers.

Finally, some customers get special deals that show up as credits on their bills. Most common are “economic development” rates designed to reward the customer for job growth or retention in a given service territory or state. Such credits may be manually typed on bills or otherwise shown as a deduction.

Whittling Down The Bill

While most electric bills are correctly calculated, many customers and consultants have found that 1 percent or more contain errors. In some cases, customers are on the wrong rate, are being charged taxes not appropriate to them, getting hit with equipment charges already paid off years ago, receiving estimated — not metered — bills because of meter problems, failing to receive pertinent discounts or being charged for a demand level seen in a prior month. To help find such mistakes and collect refunds, several hundred firms offer “utility bill auditing” services.

If an organization pays more than $500,000 a year for power, consider contracting out a review of bills to verify billing. For advice on hiring such a firm, go to http://www.energybuyer.org/marchtip2002.htm.

A variety of technical options also exists for controlling and reducing electric bills. Those options include:

  • Minimizing consumption through a range of permanent physical improvements, such as lighting upgrades or more efficient HVAC and energy management systems, and also through continuous training and oversight of building operating personnel. Note that cutting consumption by a given amount during the day may save more than doing so at night when consumption and demand charges are much lower.
  • Limiting peak demand through conservation measures and through demand-response controls that sense kw at least every 15 minutes and automatically reduce noncritical loads, such as lobby lighting and cooling in unoccupied spaces, to hold peak demand at a defined level. That might also avoid a ratchet charge.
  • Power factor requires a more sophisticated approach, such as installing large capacitors. It can also be improved during a lighting upgrade when old magnetic ballasts with a power factor of .8 or less are replaced with electronic ballasts with a power factor of .95.

For large buildings or for organizations with facilities in multiple locations in different utility service territories, it may pay to hire an energy manager who, while looking for such energy efficiency opportunities, also keeps an eye on utility bills.

Lindsay Audin is president of Energywiz, an energy consulting firm based in Croton, N.Y. He is a contributing editor to Building Operating Management.


KW vs. KWH — Big Difference

How could confusing kilowatts (kw) with kilowatt-hours (kwh) possibly cost money? Here’s a real-life example.

A small college was eligible for a rate discount if it kept jobs in a blighted part of a city. The accounting department received and reviewed the application for the discount from the city’s administration, noting that “only firms using 400 kw or less in a month” could apply. Not understanding the difference between kw and kwh, the head accountant looked at the electric bills to see that, in a typical month, the facility used more than 100,000 kwh. He quickly concluded that the college used too much electricity to apply for the discount, which was worth about $120,000 over its three-year span.

The college’s energy consultant, however, also checked the college’s bills and found that its peak demand in any month had never exceeded 396 kw, making it eligible for the discount. After a few calls and some quick paperwork, the college submitted its application, which cost essentially nothing, and is now enjoying the money.

Those familiar with energy usage know that a monthly consumption of 400 kwh may be common for an 800-square-foot apartment, whereas a peak monthly demand of 400 kw is likely to occur in an 80,000-square-foot office building.





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