Senior decision-makers come together to connect around strategies and business trends affecting utilities.


Energy: new solutions and ... pricing

Rafael Herzberg's picture
Consultant energy affairs, Self employed

Rafael Herzberg- is an independent energy consultant, self-employed (since 2018) based in São Paulo, Brazil* Focus on C level, VPs and upper managers associated to energy related info, analysis...

  • Member since 2003
  • 2,219 items added with 1,294,395 views
  • Nov 21, 2021

Energy: new solutions and ... pricing

Renewable energy in the form of distributed generation is gaining momentum and bringing new challenges to the model of valuing and charging electricity supplied via the public grid.

The tradition is to charge primarily based on energy consumption in kWh.

For low voltage consumers it is 100% kWh. For medium and high voltage ones, there is also the charge of a portion of demand, which generally represents something between 20% or 30% of the total bill.

With the public grid being the backup of renewable energy, which are intrinsically intermittent, the greatest value is in the capacity made available by the local utility.

My proposal is to develop a model based on kW of demand. The client contracts a capacity and thus has the associated energy secured on a month-to-month basis.

And, to optimize the model, the customer could trade differences (contracted x recorded) on a demand exchange that would be sponsored by the local utility company.

Bob Meinetz's picture
Bob Meinetz on Nov 21, 2021

Rafael, for what problems are you proposing new solutions?
If they are higher CO2 emissions or costs for electricity, I fail to see how distributed generation will solve either.

Rafael Herzberg's picture
Rafael Herzberg on Nov 23, 2021


Here in Brazil there is a widespread perception that PV solar is "the" solution.

In my own evaluation PV solar is very costly for "all others" who will have to bear the additional associated costs (traditional generation needed and used with a lower load factor as compared with no solar PV).

Since it is a fact that solar is increasing exponentially my suggestion is having a rate structure that reflects the actual situation. Meaning that in real life, every energy user (household in this case), should pay for a contracted capacity essentially and not the commodity.

Simply put because this is what is at stake. The amortization cost is there regardless of the kWh consumption. So my idea is solving the real life problem: making sure the supply chain is properly compensated in order to have a balanced system in the long run. 

Bottom line: if a household decides to install a PV system the fair payment would be the amortization cost of the power supply chain (roughly USD 3 000/kW to include generation, transmission and distribution)) calculated per month and using a decent interest rate. Then it is a fixed cost! It means that this household will pay basically the same amount that another which does not have PV solar because in plain terms it is the back up power there instantly available at any time!

My suggestion is the local utility company sponsoring a capacity exchange (kW not kWh) so that household (for example) would be in a position to reduce their recorded kW demand (by going for energy efficiency measures, programming energy usage so as to increase its load factor, arbitraging power costs with other energy sources available, etc., etc.). At the end of the day this household would then be in a position to "sell" excess kW capacity (contracted but not fully used) to another household in an opposite situation (willing to expand its recorded demand).

This exchange would benefit all clients because it is a zero sum game! The utility will be able to avoid and/or postpone infrastructure related investments and the clients the possibility to better adjust their contracts vis-à-vis their physical kW demands, therefore reducing their monthly costs. A win-win scenario!


Bob Meinetz's picture
Bob Meinetz on Nov 23, 2021

Interesting, Rafael, but I see several potential issues:

  1. The utility would need to overbuild transmission to ensure that if a customer has contracted for X kW, it will always be available when needed.
  2. There is no incentive to conserve energy. The incentive is to use as much as possible, to get the most value out of each customer's monthly payment.
  3. Since metering would be unnecessary, two or more customers would be able to share one account simply by running wires between multiple businesses / homes. Assuming part of customer's bill would go toward funding transmission maintenance, it would be underfunded if there were only 100,000 named accounts, but 300,000 users.

These are only first impressions, so please correct me if I'm misunderstanding your scenario.

Rafael Herzberg's picture
Rafael Herzberg on Nov 24, 2021

Hi BOB - your comments stimulate me to better inform about the concept.

1. By enabling a kW demand exchange, energy users would trade their kW differences using a platform sponsored by the local utility company,

2. It is a zero sum game. Meaning that once one user "sells" its "over contract", the other(s) will "capture" it. So the total contracted demand remains the same. 

3. Since each client is paying for the contracted demand (or if exceeding it paying a hefty penalty) there is ample incentive for energy efficiency simply put because it makes more business sense to run more efficiently and demand lower kW capacity. Examples: shifting loads to reduce peak demand, programming equipment so as to "flatten" the kW x h curve, arbitrating costs by using (potentially) selected equipment based on natural gas, etc.,etc.

4. My suggestion is having a meter (as it happen today) but with capability to measure kW demand in previously established time windows (15 min. or 1 hour, etc.). This way the utility would measure kW recorded demand and accordingly charge the maximum between contracted and recorded).

All this because in my opinion the power supply chain is also based on CAPEX which is a fixed monthly cost. Around USD 3 000/kW to include generation, transmission and distribution. 

Last but not least let me simulate what happens these days with and without a PV rooftop solution. Today there is a huge mismatch between costs actually incurred and rates used to charge the client. 



Household with no PV  rooftop

Household with a 5 kW PV rooftop

PV rooftop power production

0 kWh/month

500 kWh/month

Power drawn from the utility

1 000 kWh/month

500 kWh/month

Total power consumption

1 000 kWh/month

1 000 kWh/month

kW demand from the utility

5 kW

5 kW

Utility’s kWh delivered/month/kW invested



Make sure to "speak up" if you still have questions! I will be more than happy to go deeper!!!!

Rafael Herzberg's picture
Rafael Herzberg on Nov 24, 2021

Hi BOB, one additional comment.

A meter per energy user is a must. If - as per your example) one end user would allow others to connect to the same installation then the kW demand would increase and accordingly the bill presented by the local utility!

The kW charge would be calculated in a very simple fashion: 

a) A cost associated to the CAPEX (power supply chain)
b) A cost  associated to the fuel used (usually the matrix include renewable sources and conventional fuels as well)

I would "blend" these two costs to come up with one single capacity charge!

Bob Meinetz's picture
Bob Meinetz on Nov 25, 2021

Rafael, I'm still not understanding how your policy would work in practice.

You seem to be confusing power with energy, and they are two distinct physical values. Power is a rate - the rate that energy, a scalar quantity, is consumed (1 watt = 1 joule/sec = .001 kWh/hour). So a phrase like "total power consumption" doesn't make sense. It would be analogous to saying, "On our trip to Belo Horizonte, we drove a total of 100 kilometers per hour."

If a customer bought 1 000 kWh of energy/month, the utility would indeed be obligated to provide it. But if the customer wanted to use less energy in the first half of December, he wouldn't be able to "make up for" his savings by consuming more in the second half. Throughout the month, by your figures, his energy consumption would be limited to a maximum rate of 5 kW. If the band he wanted to play at his Christmas party needed 6 kW, he'd have to hire a DJ instead.

The confusion of power with energy is common. I believe in California it's the reason we're having reliability problems - policymakers don't understand that when solar farm is rated at 450 MW, that's the maximum rate it can deliver energy at a point in time. In practice, it will be anywhere between 0 and 450MW, depending on time of day and weather.

The distinction has big implications for transmission. If engineers try to send energy at the rate of 35 kW on cables that can only handle 600W, there will be an explosion (and probably a fire).

Rafael Herzberg's picture
Rafael Herzberg on Dec 1, 2021

BOB, let me put it this way. Using a simple example.

Let's say that there is this small business. It operates 24x7 using a constant 1 kW electric load. At the end of the month it has used 720 kWh/month.

Let's say that there is a competitor that uses a constant 3 kW electric load for 8 hours/day to produce exactly the same amount of products, consuming 720 kWh/month.

Both end up suing the same amount of 720 kWh BUT one required 1 kW capacity from the grid and the other 3 kW.

Does it make a difference?

Sure it does. The power supply chain has to invest USD 3 000/kW to meet the load, including generation/transmission and distribution.

In one case the investment is USD 3 000 and in the other USD 9 000. BUT the monthly revenue for the power supply chain is calculated in USD/kWh. Which at the end of the day reflects the same revenues in monthly billings.

Is it fair?

Bob Meinetz's picture
Bob Meinetz on Dec 4, 2021

"Let's say that there is this small business. It operates 24x7 using a constant 1 kW electric load. At the end of the month it has used 720 kWh/month."

What business uses a constant 1 kW electric load, or operates 24/7? Seems a business that averages 1 kW might, during a busy period or season, use up to 3 kW (?).

Rafael Herzberg's picture
Rafael Herzberg on Dec 7, 2021

Hi BOB, this was only one way to make my point. If the pricing system should be "fair" then the one customer who shows a higher load factor should pay less than the other who doesn't care.

Basically because in the current system it is an average cost and the ones who do a great job are not compensated for it. Quite the opposite "the others" pay for the lower load factor. 

In other words, energy users should have an incentive to lean towards efficiency (higher load factor). 

From an analytical prospective this is what I mean:

Power bill actual cost $ (PB) = [demand rate cost ($/kW) x D] + [energy rate cost ($/kWh)x C]

Where D is the recorded demand in kW and C is the recorded energy consumption in kWh.

If we devide PB by C:

PB/C = demand cost ($/kW)/C + $ energy rate cost ($/kWh)

But Load Factor = LF = C/(730 hours x D) -> C = LF x 730 XD

PB/kWh = $/kW/[730 x D x LF) + $/kWh

So the unitary cost of energy, PB/kWh = $/kW/[730 x D x LF] + $/kWh

This equation (last line) is an exponential curve where the higher the load fator the lower the unitary cost in $/kWh. 

An energy user that is driven toward an efficient energy use, the load factor is closer to 100% than this other energy user who doesn't care and shows a 50% load factor.

Two real life household examples. One has got an electric 11 kW instant shower. that is used 1/2 hour per day (5,5 kWh/day) The other has got a 3 kW tank boiler that is programmed to be "on" for just 1,8 hours hours per day. Both household use the same amount of energy per month BUT one "draws" 11 kW from the utility's grid and the other 3 kW. One household uses 8 kW of capacity (not energy) more than the other. 

In this case, both households pay the same bill to the local utility BUT the required investment (to meet each household demand) is totally different. Today it is about an average. My business proposition is properly allocating costs so that those who are efficient are rewarded. 


Rafael Herzberg's picture
Thank Rafael for the Post!
Energy Central contributors share their experience and insights for the benefit of other Members (like you). Please show them your appreciation by leaving a comment, 'liking' this post, or following this Member.
More posts from this member

Get Published - Build a Following

The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.

If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.

                 Learn more about posting on Energy Central »