Energy rate reform: What it means for operations leaders

By | May 15, 2018

By Andrea Sanders    |   Marketing Manager

The electricity grid is transforming rapidly, and businesses or institutions that do not adapt could see major changes to their energy spend. Resulting from the need to update aging and antiquated grid infrastructure across the U.S., this transition is supported by advancements in renewable energy, energy efficiency, and energy storage — technologies that fundamentally change the way electricity is generated and consumed. The energy industry calls this evolution grid modernization, a shift that brings reduced emissions, grid reliability, and new opportunities for cost savings—but also added complexity and unpredictable costs.

In the new grid, timing is everything. Today, 60 percent of the typical commercial electricity bill is connected to when a building uses energy, measured primarily in kilowatts (kW) – rather than how much energy is used, measured primarily in kilowatt hours (kWh). Over the last decade, the kW-based cost of energy bills has increased by more than 100 percent in some states, while the kWh side of the bill has remained about the same.

The new emphasis on timing is driven by a variety of factors, including local grid congestion, the variability of renewable generation, and advancements in smart grid technology that allow utilities to digitally track energy use in real-time. Regions at the forefront of this transition include California, New York, Massachusetts, and Hawaii in the U.S. Similar trends exist in other countries including Canada, Japan, and Australia. Rate reform is happening fast in these markets today, and operations leaders managing facilities in any of these regions need a strategy for responding.Operations leaders in California:
Download the guide to CA’s changing electricity rates.

Several rate changes to look out for include:

  • Time-of-use (TOU) periods shifting to later in the day. Peak time-of-use periods are those times of day when energy prices are highest. Utilities in California have already begun moving peak TOU periods to later in the day, when onsite solar is unable to help reduce costs. In addition to potentially increasing peak energy costs, this change also impacts the value of solar investments. Adding energy storage can help retain the value of solar investments.
  • Rising demand charges. Utilities are basing more of the bill on the maximum amount of energy your property uses at any given moment in a billing cycle. Now, just 15 minutes of energy use can make up half the monthly bill. California has some of the nation’s highest demand changes.
  • System capacity charges and Global Adjustment. These fees have different names and pricing depending on the region, but the structure is the same: during the utility’s highest annual peaks, customers get charged a high rate for kilowatts used during the system peak in addition to their own onsite peak demand charges. These fees have been rising over the last decade, and make up a large percentage of monthly electric bills in the U.S. Northeast and Ontario.
  • Restructuring of demand response. Demand response programs allow commercial properties to get paid for reducing energy use at certain times. These programs are being restructured to allow commercial properties to participate directly in wholesale energy markets, earning revenue from onsite assets like energy storage, solar PV, and fuel cells.
  • New retail and wholesale rate options becoming available.  In California, there are real-time pricing options available for commercial and industrial customers.  The Federal government is also working on rules that would allow retail customers to participate in wholesale markets, using distributed resources such as energy storage.  Hawaii is looking at allowing retail customers to leverage energy storage to support grid operations.  Many more rate options are being considered that give customers extremely lucrative savings opportunities if they can gain the flexibility to optimize the timing of their energy use.

Any one of these reforms could spell change for commercial electric bills, but the combination guarantees a major impact, often with little notice. Twice in two years in California, major investor-owned utilities implemented substantial changes to non-residential rates with less than a month’s notice. The key to weathering rate reform is to become adaptable. Operation teams with the flexibility to optimize the timing of their energy use will save on their bills, while those unable to change will get stuck with increased costs.

Knowing the best times to consume, produce, or store energy can have a major impact on a business’s bottom line.

In California, where demand charges are more than 100% what they were 10 years ago, a facility can generate at least 10 percent savings on electricity bills simply by addressing demand charges.

Meanwhile, in Ontario, a single megawatt of peak power today costs approximately $375,000 more than the same amount of power in 2011. Reducing energy use during the five annual peaks would save a large energy user more than $1 million in a single year.

In almost every market and industry, managing the timing of energy use is a reliable way to secure substantial gains, but it is complex and requires attention at all times. This leaves operations leaders with two options for mitigating cost risks:

  • Dedicate a full team to monitor energy use, costs, and programs around-the-clock. Be ready to scale back or shut down equipment almost instantaneously as prices suddenly spike.
  • Procure technology that allows the property to automatically adapt with the changing grid. Smart energy assets such as onsite energy storage, smart thermostats, and building automation systems offer an automated way to adjust energy patterns in response to changing price signals. Of these technologies, artificial intelligence (AI)-driven energy storage is the only one that optimizes energy timing without impacting building operations or comfort.

Learn 5 ways AI-powered energy storage helps businesses adapt to changing rates.

Many Fortune 500s and large energy users of all types have subscribed to energy storage services in markets where rate reform is taking place. Storage services produce immediate, automated savings along with sustainability benefits, as the technology interacts with the grid to support renewable adoption and reliable electricity supply for local communities.

For example, Kilroy Realty Corporation, which manages more than 2 million square feet of commercial property in the US Pacific Northwest, recently announced plans to deploy more than 7.5MWh of Stem’s artificial intelligence (AI)-driven energy storage across eight commercial buildings in California. An energy storage system operated by artificial intelligence will store and deploy energy at optimal times, responding to every fluctuation in load and rates with predictive analytics and machine learning. The platform learns and adjusts its algorithms to react to new rate structures, positioning Kilroy Realty to not only adapt to energy rate reform, but even benefit from it.

In Ontario, INOAC Interior Systems, a leading supplier to the automotive industry, is deploying 2.5 MWh of AI-powered energy storage from Stem to reduce Global Adjustment charges. Roger Dawes, President of INOAC Interior Systems Inc, stated, “Stem’s AI-driven platform and execution experience enables an automated way to reduce energy costs with no interference in our operations.”

As energy supply continues to move away from fossil fuels and outdated grid infrastructure gets upgraded, operations leaders will be presented with increased choice, control, and opportunities to reduce costs and increase net asset value. They will also face greater exposure to energy price risk and more uncertainty than ever before. The combination of substantial savings opportunities today, and the need to hedge against the energy rate reform expected in the future, are strong incentives for operations leaders to begin evaluating smart energy storage technology.