Demand Flexibility Can Help Arizona Rooftop Solar Beat Demand Charges

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Originally published on RMI Outlet.

By Mark Dyson

The debate over rooftop solar has grown increasingly contentious, pitting solar PV companies against utilities in many parts of the country. But nowhere has the debate been more heated than in sunny Arizona, where many customers have flocked to rooftop solar as prices have come down in recent years. Most recently, utility Salt River Project (SRP) has introduced a demand charge for solar customers. 

Already common among commercial rate structures but much less so among residential, a demand charge is a component of the overall bill based on a customer’s maximum demand (kW) each month, in addition to more-traditional charges based on total consumption (kWh).

SRP argues that it needs to recover costs from its solar customers that they impose on the grid through high demand. The utility position is that solar customers use the grid in much the same way as non-solar customers, and impose similar costs. Yet traditional rates coupled with existing net energy metering (NEM) riders mean that solar customers pay much less per month than other customers. SRP’s new rate is designed to recover the difference by imposing a charge on a customer’s peak demand each month, which generally occurs after the sun sets.

However, solar companies and others claim that this pricing structure is unfair. The largest PV developer in the U.S., SolarCity, has sued the utility, arguing that SRP is practicing anti-competitive behavior. In any case, whether the new rate is fair or unfair, it means that the PV market is growing much more slowly in SRP than it was a year ago; interconnect requests have shrunk from 300 per month under the old tariff to less than 15 per month under the new rate design.

But is there a way to salvage the PV market in Arizona under SRP’s new tariff?

Figure: The graph shows demand from different appliances for an SRP residential customer who runs their air conditioner during the afternoon and charges an electric vehicle (EV) after returning home from work. SRP charges for the peak 30-minute demand incurred between 1:00 and 8:00 p.m., but the output from a PV system (yellow line) falls off before that point. As a result, the customer’s demand net of PV (black dashed line) still peaks at a very high level (10+ kW) in the evening.

Demand flexibility unlocks >40% bill savings for solar customers

In RMI’s new report The Economics of Demand Flexibility, we examined the impacts of the SRP tariff in detail. In the absence of demand flexibility, SRP’s new rate structure (E-27) means that rooftop solar would no longer be an economic option for residential customers relative to their default utility bill.

We modeled a SRP residential customer with an EV who is considering installing PV and switching to the new demand charge rate. For this customer, installing rooftop solar for a financed cost of about $1,300 per year means that they save only $50 per year on their bills, which does not offset the cost of a PV system at today’s prices ($3.50/Wdc).

However, with demand flexibility we found that solar customers on this new rate can reduce their demand charges by more than 60 percent and save more than 40 percent on their total bill, net of the spend on low-cost control technology, bringing a PV system into the money.

Our modeled customer consumes more electricity than an average SRP customer, because we included an electric vehicle (EV) in our analysis. A customer without an EV would save more (~$50/month rather than $50/year) by moving to the E-27 rate. Demand flexibility could lower those customers’ bills too, by leveraging air conditioning via smart thermostats, their water heater, and other non-EV opportunities to similarly reduce their peak demand.

Figure: Cost scenarios for SRP customer. Under the base, volumetric rate, our modeled customer pays about $3,000 per year. Installing PV and switching to the new rate, bills go down about $50/year, which is not enough to offset the cost of a rooftop PV system. However, using demand flexibility levers, the customer can save more than 41 percent on their bills and thus still see an economic incentive to install a PV system.

Without changing their load profile, a customer would see no incentive to install rooftop PV. But, by using three simple technologies to control three major loads during peak periods, the customer can reduce their peak demand without any real sacrifice in comfort or convenience. The technologies needed to do this are simple, inexpensive, and available today. Most EVs already come with timers that can facilitate easy off-peak charging for no incremental cost. Smart thermostats like the Nest cost on the order of $200, but easily pay for themselves by using software to minimize total energy use as well as being easy to program to lower use during peak periods. Finally, water heaters can mitigate demand charges easily with a simple radio controller similar to what is used in existing utility demand response programs, or something more advanced.

Figure: By pre-cooling their home, charging their EV off peak, and using the storage tank of their water heater to avoid on-peak water heating, this SRP customer can reduce their maximum on-peak demand by more than 48 percent and their demand charges by more than 60 percent.

Demand flexibility can help support a $6 billion dollar solar market in SRP territory

For the customer we modeled, demand flexibility allows them to save enough on their bill to offset the cost of a PV system at today’s prices. As PV prices continue to plummet, the value proposition will look better. Scaling the bill-saving opportunity to all SRP customers who could install solar (e.g., single-family homeowners with appropriate roofs to host solar), this represents a $240 million per year bill savings opportunity. Those bill savings would unlock a $6 billion PV market for installers, at today’s prices.

To make this happen, innovative companies can provide products and services to customers to minimize demand charges. One company, Brayden Automation, has thousands of customers taking service under demand charge rates in Arizona, and is helping them to save hundreds of dollars per month on their bills. Brayden’s solution does this by directly controlling the circuits serving large appliances in order to minimize peak household-level demand. Some solar installers have started bundling these solutions with new PV system sales; others are bundling a battery with new PV systems, which can also minimize demand charges, but at a significant cost premium relative to less-expensive demand flexibility solutions.

It’s not just solar installers and other third parties that can help customers reduce peak demand; utilities can play an important role as well. Utilities including Black Hills Power and Georgia Power have offered customers technology to save customers money on their bills by reducing peak demand, and in doing so, save the utility money by minimizing the investment it needs to make in power plants and other infrastructure.

Business opportunities that start in Phoenix may spread nationwide

There are plenty of reasons to be concerned about demand charges for residential customers (see, for example, the Regulatory Assistance Project’s arguments [PDF]). But for better or for worse, they may be “next big thing” for residential rate design. There were over a dozen existing demand charge tariffs in the U.S. as of 2014, and large utilities including SDG&E, PG&E, and NV Energy have recently proposed them as well. While demand charges may be bad news for solar installers in the short term, the good news is that simple, cheap technologies available today can reduce them by up to 60 percent. In the case of the SRP demand charge for new solar customers, this takes solar PV from out of the money and puts it back in the money.

More broadly, demand flexibility holds significant promise for customers across the US. Residential demand charges seem to be the rate of the moment, and 65 million people already have access to opt-in time-varying energy rates that could be leveraged with demand flexibility. Whatever the rate structure (and whatever your opinion of it), customer options to manage their bills, enabled by new business models, keep getting better. For traditional, volumetric rates, energy efficiency and rooftop PV offer significant bill reduction potential, and as sophisticated rates become more widespread, demand flexibility is proving to be a low-cost option to help customers manage their bills.

Reprinted with permission.