To truly comprehend avoided cost, you must first understand how electric utilities bill for electricity, specifically time of use (TOU) pricing. TOU rate tariffs bill customers across multiple billing categories, each with an associated metric and rate, and differentiated by time of day and season. These time-based periods are referred to as TOU periods and typically include: winter on-peak, winter partial-peak, winter off-peak, summer on-peak, summer partial-peak, and summer off-peak — as shown in the Table (click here to see Table). The on-peak designation illustrates that the time period is associated with a region’s highest electrical demands and, subsequently, the highest unit cost.

In addition to the TOU periods, there are two primary charge types: energy charges and demand charges. The differentiation between these two charge types is significant.

Energy charges bill customers on a per-kilowatt-hour (kWh) basis. A kWh is a measure of the energy consumed by a facility in a given period of time. For example, based on the Table, a component of a customer’s July electric utility bill would be summer on-peak energy. This quantity would be the sum of all the energy consumed by the customer in July between the hours of 12:00 p.m. and 5:00 p.m. (neglecting weekends and holidays).

Demand charges bill customers on a per-kilowatt (kW) basis. A kW is a measure of power, an instantaneous measurement of energy consumption. From another perspective, power is to energy (kW to kWh) as speed is to distance (mile-per-hour to mile). Power and speed are instantaneous measurements whereas energy and distance are the latter applied over time.

Demand charges, however, add one additional step. They bill based on the maximum demand in a given TOU period. So while energy measurements accumulate based on actual consumption, much like your odometer would accumulate miles, demand charges are based on the maximum power reached within a particular period (i.e., the maximum point reached by your speedometer). If you’re facility averages a 200kW load in a given period, but some anomaly causes a temporary spike in demand up to 400kW, you are charged for the 400kW demand — even if the anomaly only lasted for a short time.

Considering that demand charges account for as much as 40% of a typical customer’s bill, these charges may seem outrageous, but electric utilities have just cause. While the commodity (energy) is the thing actually consumed, electric utilities are required to have the infrastructure in place to serve your instantaneous needs when they spike temporarily. In 2008, the California Independent System Operator (CALISO) reported that 5% of its required infrastructure was in operation only 0.2% of the time, and that 10% of their required infrastructure was in operation only 0.6% of the time. So, in essence, demand charges fund that inefficiency.

The avoidance of demand charges is an art of sorts, and is becoming the basis for an entire industry of technology. It also represents a significant opportunity for advanced commissioning services. If a particular project can be aligned in such a way that it reliably reduces a facility’s demand, then the financial return can be significant. However, if that avoidance is not realized in the field, it can spell disaster for a project’s economics.