Commercial businesses in most states are able to choose some features of their power rate structure. Yet, the majority tend to stick to just one type: the fixed rate.
At the latest Energy Cost Reduction Webinar, we welcomed Diane Mero from Actual Energy and discussed other options available to commercial electric customers: time-of-use rates.
Energy pricing rates simplified
Many commercial electricity customers have options when it comes to how they pay for their power. Even in those states there they must buy power through their distribution utility, most will be able to choose between fixed rate and time-of-use rates. Below, we break down the differences between fixed and time-of-use rates so that cultivation facility operators can understand the best fit for their operation. Further, we explain why time of use rates are not necessarily always hourly rates.
Fixed rate
Businesses crave predictability, and for this reason fixed power rates are extremely popular in the commercial sector. Assuming a customer’s electricity consumption is relatively flat, this predictability allows customers to predict with a good degree of certainty what their monthly power bill will look like.
Here’s the hitch, though: power supply companies don’t always generate the power; they procure it on a wholesale market from either bids or wholesale producers. So, in order for them to offer a flat rate product to a customer, they reduce their risk by offering a product that includes risk premiums, finance charges, and other embedded costs. The recent volatility in global energy prices will only exacerbate this anxiety and will likely lead to even greater risk aversion, manifesting in higher hedges.
Time-of-use rates
An electricity customer that chooses a time-of-use rate commits to buying power at a cost indexed to the spot market. The spot market price is largely a function of the most fundamental of economic principles: supply and demand. The Independent System Operator (ISO) dispatches the necessary generators in order to provide 1) system reliability and 2) system cost.
Furthermore, as Diane Mero noted in our discussion, “Actual Energy provides hourly pricing to its customers using the ISO’s costs, hourly—this is not indexed, it’s actual—and thereby different than a traditional time-of-use rate structure which is sold in blocks.”
One downside to purchasing power with time-of-use rates is that a customer won’t know in advance what their rate will be at any given moment in the future. When power supply gets wonky, such as during New England winters when natural gas for power generation competes with home heating, the wholesale price for power can get wild.
A recent example was when many Texas power generators shut down due to freezing weather, collapsing the state’s power supply and causing wholesale power prices to skyrocket. The good news is that for the most part, power supply is predictable and so are spot market prices. Predictive models based on historical data give time-of-use customers confidence in knowing their future energy rates.
Demand charges
Regardless of the type of rate you are on, when you use power can have an impact on how large your power bills are. This is because distribution utilities (the companies that own the power distribution network aka the “wires” and who bill you every month) levy “demand charges” based on the highest amount of power an electricity customer uses over a time period, which can be between a month to year.
What are demand charges? Thought you’d never ask!
For every piece of equipment that you turn on, you add that amount of power draw, or “load” on top of everything already on. The higher that stack, the more power you are drawing from the grid at that point in time. The height of that stack is your “energy demand,” usually expressed in kW. Utilities care greatly about that number, because it tells them how much capacity they need to be able to deliver to her facility in order to provide you with what you need for your business.
Customers should care about this number as well, because the higher stack gets, the bigger the bill will get, regardless of your total monthly power usage. Most well-run commercial operations, including a cannabis cultivation operation, shouldn’t have too “spiky” of a load curve, meaning too much inconsistency between the peaks and valleys in demand. This is when power draw is mostly smooth and steady over a 24-hour period.
For growers, their highest demand will come when flower and veg rooms are on full power and when the HVAC system is cranking to remove heat from those rooms. At these times, in order to lower demand and the demand charge, it can be a useful demand-reduction strategy would make sense to stagger timing for when the equipment is turned on. Some third parties, such as Voltus, will work with customers to develop demand reduction strategies that can even earn revenue through ISO-sponsored active demand response programs.
In addition, electricity supply charges have a demand component called ICAP, which is the installed capacity necessary to meet the grid’s peak demand. In New England, for example, the ISO-NE and your local utility calculate a recurring charge (“capacity tag” or ICAP tag) based on your usage during this peak demand hour (just one hour of the 8760 in a year) Avoiding this one hour will impact your supply bill for the entire coming year.
Energy Demand and Carbon Emissions
Did you know that the shape of a facility’s demand curve can also directly affect its carbon footprint?
This is because the more demand put on the grid at a certain time, the greater the amount of power the grid needs to supply customer. In some cases, the need for more power triggers operation of massive backup power generators, often called “peaker plants.” And sadly, these backup power generators are often ancient, filthy, inefficient beasts that run on dirty fossil fuels. So, whether you want to or not, if you are using power during these peak demand events (which may occur many or just a few times a year), you will be using dirtier, more expensive power.
Do you have questions about how all of this applies to your business?
Enlighten Your Grow provides energy and sustainability solutions to indoor cultivators. We are happy to answer any questions about how we can help your business grow while saving energy and money.