Commercial versus Residential Electric

As residential customers we pay for the amount of electricity we use.  Commercial customers often pay for peak usage.  Why is this?

Most people aren't aware of how commercial electric bills are metered versus residential bills.  Many people probably assume that a big factory or large retail establishment pays for electricity the same way we do, by the kilowatt-hour.  However such is not the case.  As I learned the hard way with my office building, most commercial accounts are charged by peak demand usage.

The reasoning is somewhat non-intuitive.  When you run a regulated utility company, you have fixed costs and then are guaranteed a modest profit by the utility regulatory commission.  For an electrical utility, you have three main costs.  The first is capital equipment, the electrical generating facilities that generate electricity for your grid. These can include coal and gas-fired power plants, nuclear reactors, hydroelectric dams, even solar cells and wind turbines.  The cost of these facilities is pretty staggering, compared to the cost of the fuel they use.  If you think about it, it is similar to the fact that the cost of the fuel that you use in the lifetime of your car is probably less than the purchase price of your car. 

The second cost is the labor and overhead of running the utility.  You have to hire all of these linemen to install the power lines and maintain them as well as established service at various residential and commercial properties as well as read the meters, which the latter of which is increasingly done electronically.  One reason the utilities are going to smart meters in smart grid is to reduce the cost of human labor in maintaining and monitoring the grid and reading meters.  Of course, the unions have been against this and have fought electronic metering for some time now.  Sort of like the buggy-whip manufacturers complaining about the automobile.

Of course fuel is also a significant cost in generating electricity.  Whether it is diesel oil, coal, nuclear fuel, or natural gas, utilities to have to pay for fuel to run their power plants unless of course they are wind, solar, or hydroelectric.

But these three major costs don't take into account another factor, that is peak demand and load. When demand for electricity rises, for example on a hot summer day when everybody turns on their air conditioner, the utility company often has to scramble to generate the additional capacity.  Either they have to fire up older generating plants which are less efficient, or they have to buy electricity from somewhere else on the grid.  Both are very expensive options.  Thus, it is in their best interest to keep the peak demand on the grid as low as possible.  It is less of an incentive for individual homeowners to consume one kilowatt-hour less than they normally do.

During the naive optimism of the early nuclear age, people felt that electricity generated nuclear power would be "too cheap to meter" which might not necessarily mean that power would be free, Only that you would pay a flat monthly fee for electricity and use all that you could.  Back then, you would see houses being built with little or no insulation, huge single pane glass windows in the Bauhaus style, with the assumption that cheap electrical power would be a good substitute for insulation and sound building practice.  The "mid-century modern" home was often very poorly insulated and an energy hog.

The reason why you and I pay for electricity by the kilowatt-hour has more to do with utility commissions than any logic or common sense.  We are used to paying for what we consume, therefore most people would reject a peak metering type of scheme.

When I bought my office on Duke Street in Alexandria, I was chagrined to find out that it was classified as "commercial space" and thus I had to sign up for a commercial electric account.  If I could have characterized the property as residential, which it formerly was before it was remodeled into office space, I could have paid residential rates which would have been much less.

Not only that, I had to pay a hefty down payment as a deposit for my electric bill, which was refunded after a year of regular payments.  Because electricity is a regulated utility, most residential users are not required to make these onerous down payments.  In addition, with a commercial account my electricity could be disconnected on a moment's notice if I didn't pay my bill, whereas residential unit users have a number of additional rights.

At the time, the local utility, Dominion Resources (Virginia Power) was changing over to electronically read meters.  These are meters that did not send signals upstream through the grid or communicate by cellular telephone, but rather used a local wireless network so that the meter reader could drive by the properties and read the meters.  For some reason they never replaced my meter and for three months my meter was not read.

I should have thought something was suspicious when for three months, especially during the summer, my utility bill was a flat amount every month, the base price for my electricity.  Then, in September, they finally realized that the meter hadn't been read, or more precisely the computer kicked out the fact that meter hadn't been read, they send somebody out to read the meter, billing me in one month for three months worth of electricity.

Since I had a commercial account, my account was based on peak demand, and this showed an enormous demand for electricity for the month of September and I received an electric bill in excess of $2,000. In fact, the amount electricity they claimed I used for the month of September was more than the wiring in the building could possibly handle.

I called the electric company and after arguing with them on the phone, they agreed to look into it and we reached a compromise agreement.  Since it was no way we could actually figure out what my Peak demand was for each individual month, they had to estimate a number which was about $1,000 for the three months.

Peak rate can create other problems for commercial users.  A friend of mine with the electrical utility in central New York tells me story about a former GE facility near Auburn which was contaminated with PCBs.  The property sat empty for a long time with a "For Sale" sign on it.  A prospective buyer contacted the real estate agent asking to see the property.  They went inside and the prospective buyer wanted to turn the lights on to see what the property looked like.  However the moment they hit that main service connect and burned even one kilowatt-hour of electricity, the minimum billing amount kicked in for that month, which came to over $6,000 for that factory, according to my friend at the utility.

So you can see, that peak demand billing can produce some odd results for companies.  Companies still have an incentive to save energy, but more in terms of cutting their peak load demand. For example, a company can hook up much of its equipment to computers and monitor the load and demand, and selectively shut off equipment when the peak is approached.  Thus, for example, lights in offices can be shut down or air conditioning can be turned up automatically to avoid going over certain peak thresholds and thus keep the demand bill from hitting a cutoff target.  And these cutoffs are exponentially higher in price, which is why my office bill was so high, when it billed three months into one.   You pay a penalty for exceeding peak load limits - a steep penalty.

Other techniques involve load shifting, shifting peak loads off-hours when most electricity generating equipment is less used.  Utility companies may actually offer incentives to companies to use electricity during off-hours by offering lower rates during these off-peak periods.  One way to do this for example as an ice storage system for air conditioning.  During the night, compressors run refrigeration systems to make enormous blocks of ice 20 or 30 ft tall and 15 ft in diameter, in giant containers that resemble oversize garbage cans with plastic tubes in them.  During the day, these are melted to create chilled water to run air conditioning units.

There's also other advantages to this technique, is it requires smaller chillers, which means less capital investment on the part of the industry.  Churches used similar techniques in the past to run small compressors during the week to make ice which was in melted on Sunday to run air conditioning equipment.  This meant that a very small chiller could be used to make this ice, lowering the need for a huge chiller large enough to cool an entire church.  It also meant that their daily electric bill was much smaller, lowering peak consumption.

So what is this all have to do with the price of tea in China?  Perhaps nothing, only that is helpful to understand how electric metering rates work.  Commercial users account for the vast majority of the income that electrical utilities receive.  Residential unit users on the other hand use very little power, but the extensive network of residential grid is far more expensive to maintain.

It also illustrates why electrical utilities are pushing to abolish requirements to repurchase electricity from home solar users at retail prices.  Not only are retail residential prices far higher than the wholesale costs that the utilities ordinarily pay for electricity, most of the surplus power from residential solar occurs at times when the utility has little use for it.

In most residential solar installations, at peak usage, which would be on the hottest days of the year in the middle of the day, the solar panels to generate a lot of electricity but perhaps not enough to cover all of the power usage in the house.  Thus, at a time when the utility needs additional generating capacity, the home solar user probably doesn't have excess electricity to sell back to the utility.

The times when the home solar panel does generate surplus electricity are going to be on sunny but cool days when the home load is low and the solar panels are operating at high efficiency.  During these periods, the utility companies have less need for excess power generating capability.  Thus, they are being forced buy electricity at the highest possible rates at a time when they don't need additional generating capacity.

And while this didn't make much of a difference to electric companies when home solar installations were mostly limited to hobbyists and experimenters, with the wide-spread implementation of leased panel installations using low-cost Chinese-made solar panels, the situation has changed.

It remains to be seen whether Elon Musk will be successful with his solar designs.  His idea is to use a solar tile on the roof and use it to charge a lithium ion battery pack which would be placed in the garage or basement of the home or perhaps as an external module much like your air conditioning condensing unit, outside the home.

During the day, the solar panels would charge the battery which would then provide power during the night and also additional power during peak usage periods when the solar panels are unable to keep up with load.  Since the user is paying residential rates (currently about $0.10 a kilowatt-hour), the user is basically storing energy and selling it back to himself at a rate that hopefully is lower than the utility companies rates.

However the cost of such an insulation could easily be two to three times or more than that of a traditional solar roof.  And with the glut of cheap natural gas keeping utility prices low, it's going to be a very tough sell for Mr. Musk.

Don't get me wrong, as an Engineer I think these ideas are fascinating.  It also reminds me of science fiction stories I read as a youth, which posited that in the future we would all be living in solar homes with energy cells in our basement.  It's just that the economic realities seem to keep pushing electric vehicles and solar power just out of our reach, at least without tax incentives or other subsidies.  And our current administration seems hell-bent on limiting these tax credits and subsidies.

The good news for Mr. Musk is that there may be a ready audience for these products in other parts of the world.  In Europe, which is dependent on the Middle East and Russia for its energy needs, solar panels and energy storage cells may find a wider audience, along with electric cars.  Developing countries might also find this technology very attractive, particularly in countries where corruption and incompetence have resulted in the intermittent and unreliable electrical grids.

It is interesting, but many of these developing countries tend to leap frog technology.  After the Vietnam War ended, the infrastructure in that country was pretty much shattered.  Rather than try to rebuild a traditional telephone network, the Vietnamese skipped that entire generation of technology and moved directly to cellular service.  That turned out to be a good move.  Perhaps countries such as that would move to solar power more readily than the United States., as they are already paying more for electricity making such a installation more cost-effective, and of course far more reliable.

And maybe, once these technologies have been proven in emerging markets, where they make more economic sense, they may finally be adopted here.