A smart friend of mine some time ago once explained capacity charges with metaphor I’ve always thought was pretty cool. Here’s my version:
Consider the parking lot of a large shopping mall. The mall has to have enough parking to satisfy the influx of shoppers on the busiest days of the year: Black Friday, the day after Christmas. You get the idea.
Even though the parking lot fails to meet its maximum capacity virtually every day of the year, it has to be ready for the few days when demand for parking is at its peak.
The mall assesses a parking charge to its tenants, but not everyone has to pay the same amount. It makes sense that since more shoppers flock to the big-box department store than the little cookie shop, the big store has to pay more for parking capacity.
So the mall takes a sample of how many shoppers are in each of its stores on the busiest days of the year, during the busiest hours. Then, based on each individual store’s numbers, the mall adds a parking lot capacity charge to each tenant’s monthly bill over the following year.
Like a shopping mall parking lot, the Independent System Operator (ISO) of an energy grid has to be ready to deliver when demand for electricity is at its peak.
Every month your business is charged a fee—called a capacity charge or peak charge—based on how much electricity you consumed during the peak consumption hours of the year when electricity demand throughout the grid was at its highest.
The ISO establishes its capacity costs in terms of $/kW or MW consumed during what are known as peak consumption hours. These are typically the hours during which the grid is at its peak. Here in New England, the basic value of capacity, in $/kW month, is determined by an ISO-NE auction process and these values are known 3 years in advance of any given year.
While total capacity costs are determined by the ISO, the charges you see on your electricity bill are determined by your particular supplier. Capacity charges, therefore, vary from supplier to supplier.
The thing to realize as a customer who pays for electricity, is that capacity charges can account for 20-30% of your monthly electricity bill!
So how can a business lower its capacity charges?
Demand response and peak load management often involve similar curtailment practices. If you can curtail your energy load as part of a demand response program, then you can potentially lower your capacity charges by lowering your consumption during the times when peak usage is calculated (peak consumption hours).
CPower can help you make this happen by putting powerful tools in the palm of your hands with a complete peak demand management predictor system on your desktop or mobile device.
CPower’s peak demand management system identifies peak consumption a day in advance, alerting you to the year-long savings available, so you can make the necessary short-term reductions in consumption to benefit from the long term gains of lowering your capacity charges.
To learn more about capacity charges and how you can lower them, contact CPower and we’ll get you on your way to optimized demand management.
See Phil in an animated video about how to offset rising capacity charges with demand response.