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Facility executives who don’t understand how their power is priced have been disappointed when their energy projects failed to produce expected dollar savings. Here’s how not to be one of them.
Your electric rate is spelled out in a document called a “tariff” that can be downloaded from your utility’s web page. A tariff should clearly spell out the costs for each component that is part of your rate. Don’t be surprised to learn that it contains a bunch of them. Unlike residential electric rates, commercial electric bills are not based solely on the quantity of kilowatt-hours (kWh) consumed in a billing period (in the United States, that’s a month). Instead, different rates may apply to how your power is supplied, how it is delivered, when it was consumed, its voltage, how fast it was used (in kW), and other factors.
If a tariff’s lingo and word structure are too opaque, spend some time with a utility account rep to translate it. Many state utility commissions also have customer advocates that may assist. Alternatively, for a fee, facility managers can privately chat with an energy consultant.
Many facility managers try to estimate savings based on an averaged electric rate, i.e., annual electric spend divided by annual kWh. However, such a number may obscure the fastest rising cost component: monthly peak demand charges, measured in dollars per kW (or kilo-volt-amperes, kVA).
This charge is like a monthly speeding ticket, based solely on the highest speed you drove during that time. In some areas, peak demand charges now account for 30 to 60 percent of a facility’s annual electric spend. When projecting energy cost savings, failing to separately account for kW peak demand and kWh consumption may result in erroneous results, and a lot of questions from the C-suite.
How peak demand charges are calculated varies among utilities. Some base it on the highest average speed of use across one hour in a month, while others may use the highest average speed during a 15- or 30-minute period. Others may average several of the highest speeds within a defined time period (for example, 8 a.m. to 6 p.m. on weekdays). It is whatever your tariff says it is.
Because some power-consuming (or producing) devices vary in their operation or abilities, they may save money on a few — but not all — of those rate components. If an equipment vendor calculates savings from its product by using an average electric rate, take pause. Tell the vendor to return after the proposal has been redone using tariff-based numbers.
When a vendor is the only person calculating potential savings from using a product, there’s also a built-in conflict of interest: The person profiting from an equipment sale should not also be the one calculating its expected financial return. Before signing any energy project contracts, it’s essential that someone independent of the deal reviews projected savings. That person (typically an energy or engineering consultant) should be quite familiar with your facility’s electric tariff, including any special provisions, riders, discounts, etc., that may pertain. When this doesn’t happen, savings often don’t occur as planned.
For example, some utilities add another form of demand charge, based on the highest kW in a year. It has various names: capacity, contract demand, or the generic term “ratchet charge.” Some utilities also have a minimum ratchet charge which may be based on a percent of a facility’s annual kW peak. It ensures collection of sufficient utility revenue to cover the cost of installed transmission and distribution even when a customer significantly cuts its peak demand.
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