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Solar PV Cuts Peak Demand Charges

January 18, 2013

Winter 2013

Solar power from photovoltaic (PV) panels, when secured through long-term contracts, has become competitive with power supplied by utilities. Under a Power Purchase Agreement (PPA), a developer designs, installs, owns, maintains, and operates the PV system at a customer’s site, and sells the power generated by the system to the customer at a competitive rate. Through such arrangements, many facilities are now securing years of lower cost and pollution-free electricity.

And the incentives to cover part of the installation cost just keep getting better. NYSERDA recently announced its NY-Sun Initiative (http://ny-sun.ny.gov/) to expand PV installations at NY customers’ sites.

The initial rate that the developer charges the customer depends on a variety of factors, including the installed cost of the system; any rebates, incentives, or renewable energy certificates associated with the system; and the developer’s required return on investment.  PPA’s are especially attractive to non-profit institutions that cannot otherwise take advantage of tax incentives. The initial rate per kWh can be up to 15% lower than the utility rate, or it can be at or even slightly higher than the utility rate.  In the latter case, the system can still be economically beneficial to the customer if the annual PV rate escalation is less than the projected utility rate escalation over the 15 to 20-year term of the PPA.

But care is needed before signing on to a flat electric rate for PV power, especially over a contract that may run 15 to 20 years. While a flat price may be fine for a residential customer whose utility rate is based solely on his kWh consumption, many commercial rates include a separate charge for monthly peak kilowatt demand (kW). In such cases, a flat PV rate may assume that both kWh and kW will be saved proportionately, but some analyses have challenged that assumption.

A typical flat panel PV system orients the units to maximize kWh production. With such fixed positioning, the output varies as the sun moves across the horizon, being greatest when the sun’s rays are perpendicular to a panel at noon. But earlier or later in the day, output drops off sharply as those rays strike the panel at shallower angles. To reduce a building’s peak demand by the kW capacity of the panel, the building’s load would therefore need to peak close to noon. If the load peaked much earlier or later in the day, the PV impact on peak kW could be marginal, or even zero.

In such cases, the dollar value of the PV power may be closer to the marginal daytime kWh price – without peak demand – rather than the overall average kWh rate, which has the full cost of monthly demand built into it.

How a customer’s tariff defines peak demand may also impact demand savings. Many tariffs calculate a customer’s monthly peak demand based on the highest peak seen during a specified weekday period (e.g., 8:00 AM to 6:00 PM) even when demand may be significantly lower the rest of the month. Under such tariffs, even if a building’s load peaked at noon, a month’s potential demand savings may be reduced if – only once in that billing period – the sky at that time is heavily overcast or if it’s raining, either of which may noticeably reduce hourly PV output.

To properly determine the value of a flat PV electric rate thus depends on understanding a building’s load profile and its electric tariff.

In a recent analysis of an industrial facility considering the installation of a large PV system, hourly interval data was used to diagram how that system would affect its load profile. We tracked demand usage versus power generation from the PV. We noted peak demands occurred in the morning between 8:00 AM and 10:00 AM. The load drops slightly in the middle of the day and afternoon. We stimulated the impact of PV. The results showed that midday loads would have been suppressed by the PV system’s output but the morning peak demands, while shortened, were essentially unchanged in magnitude. All days were assumed to be bright and sunny, with none overcast or raining.

In this case, the PV system would have generated millions of kWh savings, but its peak demand charges would have remained the same. The PV developer wanted to charge a flat $.15/kWh (plus an annual escalation) for his electricity for 20 years. That $0.15 was promoted as a 12% discount off the customer’s present $0.17/kWh average utility rate – which included peak demand charges. When that rate was calculated without any demand charges, it averaged about $0.10/kWh. In light of that difference, the developer was asked to revise his proposal but refused to do so.

Another study found similar results with other types of buildings, due mainly to the non-coincidence of PV output and time of peak demand. Sampled apartment buildings, for example, peaked most often after 5:30 PM, when PV output was quite low. In all cases, electric bills would have shown significant reductions in kWh but, to a lesser degree, reductions in actual cost.

To avoid surprises, those considering large PV installations should have a competent consultant review their annual hourly load profile and their utility tariff before signing a long-term contract.

Click here to read the full LA Confidential Winter 2013 issue.

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Luthin Associates

Written by Luthin Associates

Founded in 1994, Luthin Associates provides energy advisory services to all industry sectors in the New York Tri-state region and beyond. In 2019, Luthin Associates joined forces with 5, an innovative energy advisory firm comprised of energy innovators, commodity traders, analysts, engineers, and former energy supplier executives. As part of the 5 family of companies, Luthin Associates provides strategic advice on energy-related matters including procurement, demand-side management, rate optimization, regulatory intervention, benchmarking, bill auditing, RFP management, sustainability planning services, renewable power, and distributed generation.