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DEX: A New Concept for a Century Old Challenge

image credit: © Nataliia Mysik | Dreamstime.com

This item is part of the Special Issue - 03/2020 - Innovation in Power, click here for more

Industrial, commercial and institutional energy users above a certain size (usually 100 kW) must contract kW capacity (demand) from their local power distribution companies.

These energy users pay on a monthly basis not only for the commodity (kWh) but also for the demand (kW), known also as “wire fees” - a fixed monthly cost. Actually the demand charges are one of the most important breadwinners for power distribution companies. This model is universal. Just in the USA, power distribution companies collect about one hundred billion Dollars in demand charges!

This model is actually very stiff for energy users, mainly because from their prospective, changes is the name of the game - as opposed to what happened in the past, when they could plan kW demand well in advance.  These changes involve the intensity of the activities, energy conversion processes, what actually is done in a given location, energy management controls change the way power is used, human behaviors change and of course the economy as a whole… so at the end of the day, changes are a very important factor.

But… the way kW demand is charged did not change for many decades. It is a very simple arrangement around the globe. The power distribution company compares the recorded, physical, demand (usually the maximum of 15-min intervals in every month) with the contracted demand. The biggest one is then used to charge the client. The contracted demand may be a fixed kW value – a very popular arrangement or a “ratchet” by which the power distribution company stipulates that the contracted demand is a percentage (typically in the 50% to 85% range) of the maximum recorded demands of a window of months (it may be a one year period or sometimes just the summer months).

Demand charges represent anywhere from 20% to 40% of the end-user’s monthly power bill. It is therefore a very significant value!

The proposed concept is a demand exchange – DEX (as I call it). It is basically a zero sum game from the power distribution company’s prospective, meaning that the demand charges collected as whole will not change. On the other hand it will allow energy users to trade their demand differences in a win-win situation.

An energy user willing to reduce its contracted demand “posts” the “idle kW” (difference between contracted demand and recorded demand) at the DEX. Another energy user connected to the same power distribution company, in the opposite situation, is willing to increase its contracted demand. The DEX enables these energy users to  meet (internet based service sponsored by the local power distribution company) and engage in a demand transaction, by which their kW differences are exchanged.

There are very important advantages for all parties involved. The energy users will better adjust their contractual kW demand needs: not paying for idle demands or excess penalties (for surpassing the contracted demand). The distribution company will collect exactly the same total kW contracted demand but with an extra benefit: an idle demand that was contracted by one energy user when exchanged with another one will become “active” resulting in additional kWh sales.

Using a technical jargon: DEX increases the power distribution company’s load factor! In other words it allows the distribution company postpone infrastructure related investments. Since this is a capital intensive business, we are talking about big Dollars!

DEX is a concept synergetic with a list of other programs ranging from demand response, energy efficiency, distributed generation, bring your own device, etc. It is essentially a non-wire-alternative.

From a regulatory prospective it is a simple situation because the power distribution company is offering a better “deal” as compared to the current regulations. So the most important challenge to implement this concept is essentially marketing. The power distribution company should let the clients know about this value added service and actually stimulate them to fine-adjust their contractual demands.

BENEFITS: THE BELOW BULLETS IS AN ILLUSTRATION 

  • Just for the sake of initial calculations, let us consider that the power grid investments involve USD 500/installed kW
  • DEX might for example postpone new power grid investments for 3 years considering a load factor improvement of 5%
  • This is a feasible assumption: the current distribution company’s load factor may be for example 75% and it could climb to 80%
  • Load factor = (kWh consumption of demand charged energy users)/(kW contracted demand x Hours per month)
  • Contracted demand per energy user may be a simple fixed value or a ratchet (% on maximum recorded demand in a one year period)
  • Amortization costs of USD 500/installed kW using a 10% per year interest and a 20-year-timeframe is USD 60/installed kW/year
  • Postponing for 3 years results in USD 180/installed kW
  • If the aggregated load of industrial, commercial and institutional energy users (charged by demand) is 1 GW the postponement benefit is therefore USD 180 Million
  • If a medium sized power distribution company does have a 3 GW load of energy users charged by demand it is a USD 540 Million benefit

HOW DID I COME UP WITH THIS CONCEPT?

  • I was consulting for two right next door neighbors at the same time: a 2 500 kW mall and a 3 000 kW industrial plant
  • The mall wanted to increase its contracted demand by 500 kW and coincidently the plant wanted to decrease its contracted demand by 500 kW
  • The power distribution company required the mall to wait a year because the grid was already operating at its nominal capacity. They would have to reinforce it.
  • The plant was told to ask for the reduction and accordingly pay for the 500 kW idle demand for 6 months (regulations)
  • If DEX was there, the mall and the plant could have traded their demand differences right away (no need to wait)
  • The power distribution company would increase its energy sales (for the same total contracted demand) with no extra investments
  • The two clients would be “happy”
  • But in reality: the mall had to rent diesel gen sets and run them for a year to cope with the new load until the power distribution company was able to increase the contracted demand
  • The mall paid a lot higher for the kWh because the variable cost of a gen set is about 3 times the regulated power rates
  • The plant paid the “idle” 500 kW demand for 6 months

It was the opposite of a win-win situation and most importantly the power distribution company was a looser as well

Discussions

Matt Chester's picture
Matt Chester on Mar 24, 2020

But… the way kW demand is charged did not change for many decades. 

Indeed, and just great changes might have been scoffed at in previous years, but now that the utility sector has become home to innovation and creative solutions I'll be curious to see where your DEX ideas go!

Edgard Villarinho's picture
Edgard Villarinho on Mar 24, 2020

The electrical distributors should take the initiative to offer this trading to the subscribers located, at least, in the same neighborhood, since no investments would be required on the distribution network. Considering the advent of battery provided renewable energy generators, which mitigates the peak demands, and even the on-grid solar systems which also contribute in the same direction, it is time the users and the suppliers got rid of an anacronical way of flatening the charge factor. Indeed, this DEX concept is an important paradigm breaktrough which, by the way, will help keeping the users rather conected to the conventional energy distribution instead of gradually running away to solar.

Chris Law's picture
Chris Law on Apr 4, 2020

Why not go one step further and create a flexible demand (tariff) based on the load or utilisation factor?  A Utility will pay for load when its low (voltage management) and vice versa.

Rafael Herzberg's picture

Thank Rafael for the Post!

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