Utility ‘Demand Charges’ Offers Best Solution to Utility Costs Problem

In a prior post I provided a primer on the economics and politics of the rooftop solar industry in Arizona. Net metering was essentially a solution to the initial introduction of rooftop solar into the residential consumer market. The rooftop solar industry took advantage of the political process by carving out a government-sanctioned incentive in the market that allowed them to operate and profit despite harsh economic realities in the renewable energy market.

Rooftop solar companies lease their solar panel system to consumers because the vast majority of consumers cannot afford a system that costs tens of thousands of dollars.  They needed an effective marketing message to “sell consumers” on leasing their product – an incentive to overcome the objection of cost. Thus net metering was offered as an incentive.

Here’s how it works. Most consumers do not use all the electricity generated by their rooftop system throughout the day. Net metering allows any excess electricity to be “sold” back to the main electrical grid. Consumers effectively build up a credit for the excess power they provide back to the grid. The amount of that credit is based on a retail rate that is higher than the wholesale market rate offered on the grid.

That difference between retail and wholesale electric rates is what has become the center of dispute between the rooftop solar industry and utility companies. It adds up to millions of dollars.

Utility companies argue that the cost to repair, maintain and upgrade the main power grid has not been taken into account as the market for rooftop solar has expanded. As utility companies continue the practice of net metering and purchasing back electricity at a rate higher than market value, it is negatively impacting the cost to maintain our electrical infrastructure. These costs ultimately get passed on to ratepayers, especially those who cannot afford to install and lease expensive rooftop solar systems. The result is that rooftop solar customers are paying less than non rooftop solar customers for the maintenance and improvement of our power grid.

This is where the idea of a “demand charges” becomes an economic and equitable solution for all users of the grid.

Rather than continuing an unfair solar net metering policy that gives wealthier ratepayers an advantage over lower income ratepayers when it comes to maintaining the grid, why not charge individuals for the demand that they actually place on the grid?

Most electricity consumers put most of their demand on the system during the early morning and early evening. It’s part of our daily routine: wake up, eat, prepare for work and head off to work. In the early evening, we come home, cook, clean and entertain ourselves before repeating the same routine the next day. Now aggregate that across millions of households and its easy to see how residential demand on the grid spikes twice a day.

Demand charges are determined by the maximum amount of electricity demanded by a consumer during a specific measure of time such as a day, week or billing period. This is the cost or strain placed on the grid when turning on appliances, air conditioning, etc. and is especially prevalent here in Arizona during summer months. Consumers who run all their appliances at the same time every day place a higher demand on the grid than those who spread their use of their appliances out over the same 24 hour period.

Here is a video put out by a South African utility company explaining the concept of energy demand charges:

Here in Arizona, the Arizona Corporation Commission is hearing a request from Tucson’s Unisource Energy Services – the utility that provides power to rural and southern Arizona. In its request it is seeking a rate increase and structure for ratepayers in Mohave and Santa Cruz County in order to alleviate the burden on the power grid and non-rooftop solar ratepayers. The request includes adjusting the net metering rates to current market values and implementing “demand charges” that allow it to compensate for the demand on the grid.

California-based rooftop solar companies are lined up in opposition to the changes and have even threatened to pull out of Arizona cutting hundreds of local jobs. These are the same companies who are profiting off the artificially-priced subsidy set in net metering. If UNS wins approval of the market rate adjustment in its net metering rate request, only new solar installations will receive the market-adjusted subsidy.

The UNS request also includes approval for a “demand charge” meant to cover the costs associated with peak demand. This charge would be optional for residents and small businesses but would be mandatory for any new rooftop solar installations which “create new cost burdens and reliability concerns for utilities and their customers.”

If approved, such changes will begin the process of correcting manipulations in the market and reducing special subsidies for residential rooftop solar industry.

As someone who opposes government sanctioned subsidies, it’s time that solar users finally help cover the cost of the grid that non-solar users have been paying for without receiving any benefit. Implementing “demand charges” and adjusting the net metering rate are necessary decisions to restore a free market solution to a corporate cronyism problem. It’s the fair and economically sound thing to do and maintain the reliability of our power grid to the benefit of all consumers.


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