What You Need to Know about Your Electric Bill before July

June 6, 2014

Avoid peak demand charges that climb with summer temperatures.

I spent this week in Hong Kong where summer has arrived and everyone is scrambling to reduce the peak electrical charges that hit during the hottest months. Due to the trend of increasing global temperatures, it is worthwhile to analyze your electric charges before the summer heat hits. Note that April 2014 tied its record for hottest global average temperature. It also marked the 350th consecutive month in which global average temperatures exceeded normal. Energy prices are also climbing, so heed this advice before things get steamy.

Getting Started with Bill Analysis

Whenever I execute an energy audit, I ask for at least two years of energy bills so that I can see historical consumption and charges. I can normalize this data to account for weather or other variances such as increased or decreased use of the buildings (more/less occupants, production, etc.). Once normalized, you often can compare the energy use per square foot against benchmarks and databases such as ENERGY STAR. If you have multiple facilities, you may compare their energy consumption against each other and even launch challenges to see which facilities achieve the least energy density.

Electric Bill Components

Most electric bills are composed of five or six primary components:

  1. Customer charge (fixed each month)
  2. kW (demand charges)
  3. kWh (energy charges)
  4. Fuel adjustment charges
  5. Environmental, regulatory, etc. surcharges
  6. Sales tax (if applicable)

Demand Charges

After performing a peer comparison, I usually examine the demand charges (in both summer and winter months) to see if they consistently account for more that 40% of the bill. If so, then there are cost-saving opportunities in merely shifting the load or using energy scheduling to reduce power consumed during specific periods of the day. Many of my clients have electric rates that are two to five times more expensive during certain hours of the day. Pricing also varies by season.

Here is how demand charges are typically assessed: Most utilities monitor demand (your power load) every second and then calculate an average kW load over 15 minutes much like how a car can calculate average speed on a drive. The highest peak load for any 15-minute period is recorded and likely shows up as your demand charge each month. However, power factor and ratchets can also influence the amount billed.

Power Factor’s Impact

Power factor (PF) is an expression of power quality, ranging from 0-100%, and is usually measured by your utility. PF is the ratio of kW to KVA (1,000 volt amps). Although you may not recognize KVA, it is what most electric utilities supply. PF is influenced by inductive loads such as motors as well as other processes like welding. Because large motors are popular in many buildings, it is worth looking to see if you have a PF penalty on your bill. See the diagram of the relationship between kW, KVA, and PF.

If you have a high power factor, there will be a small angle between kW and KVA, and the lengths of the hypotenuse and the base leg (kW) will be close to the same value. If PF is low, then this angle will be large, and it is easy to see that the utility needs to supply more KVA for the same about of work done (kW). See the pair of diagrams that show the relative angles when PF is either high or low with a fixed amount of work being done. Utilities will often charge you an extra fee if your power factor is below 70% (or some number ranging between 60-100%). If your PF is low, you can correct the problem by installing capacitors or other approaches. Note that if you are billed on KVA, you should not see a PF charge, because it is already incorporated.

Look Out for a Ratchet Clause

A ratchet clause is a common way for utilities to recoup the short-term, extreme expenses they incur during summer months when they have to supply more power to account for air conditioning loads. Basically, a ratchet clause (or similar pricing strategy) motivates clients to use power in a more consistent pattern throughout the year, which makes it easier for the utility to forecast and deliver energy based on more level loads. If you notice that your billed demand doesn’t change from month to month, it is highly likely that you are being ratcheted.

Here is how ratcheted demand charges are calculated: The utility notices when you set a new high peak demand (any 15-minute period). If the ratchet is 80%, then going forward for the next 11 months, the utility sets a minimum billed demand for approximately 80% of the maximum recorded peak kW. Thus, as the line graph illustrates, even if you use a smaller amount of power during a following month, you will be billed 80% of your previous peak. Note that ratchets typically vary from 50-100%, so it is good to know the ratchet level!

Another example: Let’s say that you turn on all your equipment during a 15-minute interval and you set a new peak demand that is 1 kW higher than normal. In this case, you would pay your typical demand cost, which might be about $10 per kW for that month. But you would also be obligated to account for the ratchet for the next 11 months. Assuming a 70% ratchet, then for each kW of new peak:

=(.7)*(1kW)*($10/kW-month)*(11 months/year)

=$77 per year

Conversely, if you shifted one megawatt of demand to off-peak, then you would save $77,000 in demand charges over a year’s time. This can be accomplished via demand response or thermal energy storage strategies.

It is worth mentioning that some utilities may not assess demand charges or ratchets. However, in every continent I have worked, the utility finds a way to recover their summer (or peak period) costs. They can do this via the methods described above, by having a relatively high kWh cost during certain periods, by charging extra fees if you exceed a predetermined baseline, or by charging for larger transformers (needed for high kW loads).

Energy Charges

Compared to the previous calculations, kWh charges are relatively simple and represent the amount of energy you consume over a 1-month period. An analogy: If you were filling up a swimming pool, the volume of water compares to the kWh charge, while the flow rate out of your hose represents kW charges.

Note that fuel adjustment charges are periodic adjustments to account for the price variance of commodity fuels that are used to make the electricity. For example, if coal or natural gas prices go up, then the utility passes those variable costs on to consumers. Because most utilities are highly regulated, fuel adjustment charges are easier to implement than adjusting the rate structure (or tariff structure), which can be a lengthy process.

Environmental and Miscellaneous Charges

Many people don’t realize that these charges can add 10% to your bill. There is not much you can do about this, but when calculating savings, be sure to count these charges as well as the sales tax (which can be another 5-9%), which you won’t pay when you reduce consumption.

What To Do

Understand the importance of demand charges and their potential impact on your bill. There are many ways to lower kW costs by using dimming controls or turning off non-critical electrical loads during peak periods of a day. Huge savings can be accomplished with load scheduling if your business can be a little flexible. Feel free to share your success stories with me at [email protected].


Eric A. Woodroof, Ph.D., is the Chairman of the Board for the Certified Carbon Reduction Manager (CRM) program and he has been a board member of the Certified Energy Manager (CEM) Program since 1999. His clients include government agencies, airports, utilities, cities, universities and foreign governments. Private clients include IBM, Pepsi, GM, Verizon, Hertz, Visteon, JP Morgan-Chase, and Lockheed Martin.

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