Your local electric company has to build its electricity network for the peak scenario - when people are using the most electric so that you’ll always have energy when you need it. But doing that is not only difficult; it’s expensive.
Businesses and industrial facilities often pay a premium for this dependability, which is captured on their electric bill as demand charges.
These are often the most expensive part of your utility bill, sometimes contributing 30-70% of your total electricity costs. What can your business do to cut demand charges? Depending on your situation and your demand charge rate, you could use solar energy storage to shave down your peak demand and slash those charges.
What Are Demand Charges?
Demand charges are based on your highest average electricity usage over a defined amount of time (which is typically 15 or 30 minutes) and is known as a peak demand period. You’re charged a premium price per kilowatt during this peak demand period.
Say your demand charge rate is $15 per kilowatt. During your 15-minute peak demand period, you use 100 kilowatts. You’ll be charged $1,500 in demand charges for those 15 minutes.
Want to learn more? Check out this blog on Demand Charges with Solar Energy.
Demand charges can vary greatly across states, depending on rate design processes and how costly maintenance work to the power plants and distribution systems are in the area. In a National Renewable Energy Laboratory (NREL) study, maximum demand charges range from $0 to over $30 across the United States. However, if your business has gone solar, you may be able to reduce these with peak demand shaving.
The map below shows the maximum demand charge for regions in the 48 continental states. This can help give you an idea of what you pay for demand charges.
What is Peak Demand Shaving?
Peak demand shaving is strategically reducing your electricity demand during your peak demand period. By creating less demand on the grid, you’ll be incurring less demand charge fees, thereby lowering your electric bill.
By smoothing out your electricity demand throughout the day, you’ll be making it easier on the utility to dependably meet the electricity needs of the area. That means less maintenance on the grid and less frequent expansions.
Peak Demand Shaving with Energy Storage
One of the top reasons businesses go solar, other than its positive impact on the environment, is to save money. But how much does solar help when it comes to demand costs?
Depending on your business, your peak demand period may happen at 12 pm when the sun is shining brightly above, or it may happen at 12 am when the sun is 12,500 miles away on the other side of the Earth.
If your peak demand period happens during the day, your solar panels can help by lowering the amount of electricity you need to draw from the grid at the peak demand rate. Your power needs are taken care of by your solar system, meaning you don’t draw as much from the grid during that time. But if a cloud goes by during that 15-minute interval or your peak demand period happens at night, solar panels won’t help reduce your demand charges.
If you live in an area of the country where demand charges are very high, it may make financial sense to invest in battery back up system to store your solar energy. This is another way your solar system can help reduce electricity costs.
With an energy storage system hooked up to your solar panels, you’ll be able to take advantage of the free electricity produced by your solar system and use it whenever it makes the most sense for your business - your peak demand period - regardless of the time of the day or weather.
Is Battery-Backed Solar Worth the Money?
While battery technology is advancing and becoming more affordable, peak demand shaving with batteries will still require a substantial upfront investment. Before deciding to invest in a battery system, it’s important to consider this and to make sure you’re making the best financial decision for your business.
To determine if peak demand shaving with a battery-backed solar system is worth it, you’ll have to compare how much you’re paying in demand charges with the cost of energy storage.
How Much Are My Demand Changes?
The higher your demand charges are, the most likely peak demand shaving will be a worthwhile investment. It all comes down to whether or not the energy storage system will cost less than your peak demand charges.
Though the payback on battery systems can only be evaluated on a case-by-case basis, it could be worth it for businesses in the upper half of the $0 - $30 per kW demand charge range. The map below shows the density of electricity customers who pay demand charges that are over $15 per kW.
How Much Are Batteries for Solar?
There are different types of batteries which offer different benefits, require varying amounts of maintenance, and of course, vary in price.
Learn more about batteries for your solar system:
You can expect to pay between $400-$800 per kWh for a battery, which does not include installation costs. There are some incentives for purchasing solar batteries depending on your situation and location which could help keep costs down. If you’re making the decision to install batteries at the same time as your solar system, you may be able to use the 26% Federal Solar Tax Incentive and depreciation for businesses; however, if you are adding an energy storage system to your existing system, you may not be able to use it.
For customers in the state of Maryland, there is the Maryland Energy Storage Income Tax Credit Program. The incentive offers 30% of the cost of an energy storage system installed during the 2019 tax year. It’s capped at $5,000 for homes and $75,000 for businesses and must be fully used in the year the energy storage system is installed.
Let’s go back to the peak demand example from earlier. At your peak demand, you use 100 kW in 15 minutes at a rate of $15/kW. You’ll rack up a charge of $1,500 each month. You will need batteries that can cover the 100 kWh of electricity you use during your peak demand period. Though the size battery you’ll need is dependent on the depth of discharge, for this example we will assume you’ll need 12 x 9.3 kWh batteries. With installation costs, this can run around $180,000.
In this situation, you can expect the payback on your battery system to be about 5 years, if you can take full advantage of the tax credit and depreciation benefits. If you are in an area in the country with extremely high demand charges, say $30 a kW, and you can take advantage of the tax credit and depreciation benefits, you’ll reach payback much sooner - in less than 3 years! And of course, if you are in a state like Maryland that has specific incentives for storage systems, the payback may be even shorter.
|Demand Charge Rate||Demand Charge Cost Per Month (assuming 100 kW usage for 15 minutes)||12 x 9.3 kWh Batteries & Install Costs (No Incentives)||12 x 9.3 kWh Batteries & Install Costs (With Incentives*)||
Payback With Incentives
$5/kW Demand Charge
|$10/kW Demand Charge||$1,000||$180,000||$95,616||8 Years|
|$15/kW Demand Charge||$1,500||$180,000||$95,616||5.3 Years|
|$20/kW Demand Charge||$2,000||$180,000||$95,616||4 Years|
|$25/kW Demand Charge||$2,500||$180,000||$95,616||3.2 Years|
|$30/kW Demand Charge||$3,000||$180,000||$95,616||
*Incentives include the 26% Solar Tax Credit and 100% Accelerated Depreciation at a federal tax bracket of 24%. Does not include the Maryland Energy Storage Income Tax Credit Program.
Another thing to note is the expected life of your battery system. A solar battery’s useful lifespan is between 5 and 15 years, depending on the type of battery. While lead-acid batteries are cheaper, they often have a shorter lifespan and a smaller capacity. Lithium-ion batteries have a larger capacity and longer life but cost significantly more. Charging and discharging your batteries will also reduce their ability to hold a charge, so the more frequently this is done, the shorter their useful life.
It’s also important to note that your solar system will have to produce enough electricity to charge the battery. If you have several days where cloud coverage is thick, your battery may take longer to charge and may not be able to offer the ideal savings.
Other Ways to Peak Demand Shave
In addition to energy storage systems linked to a solar system, there are a couple of other ways to cut those demand charges. Whether it’s gas-powered generators or load shedding, neither require as large of an upfront investment.
Are you looking to reduce your operating costs? Reach out to us to learn if peak shaving with a solar energy storage system could help keep your energy costs low.