Capacity charges can account for more than a third of a building’s annual electricity expenditure, and yet the opportunities to reduce them are routinely overlooked. New environmental and economic benefits are emerging, making demand management more lucrative.
What are Capacity Charges and how are they calculated?
Capacity charges are fixed fees added to bills by electricity network providers. And while the method of calculation varies between distribution networks, in Australia they are typically determined on a 30-minute interval basis during a defined weekday calculation window. On most networks, a building’s capacity charge will ratchet up to a higher level every time a new demand “peak” is recorded, and it will stay there for 12 months.
For many years, Buildings Alive has been working with leading property owners and managers to refine our peak demand forecasting and forewarning capabilities, assisting them to develop demand management plans and minimise capacity charges through active and automated load shifting strategies. Usually at about this time of year, we start having conversations with building owners and managers about how to minimise the “capacity charges” on their electricity bills. An article we published last September provides a good summary of what we do and links to additional information.
More good reasons to manage demand are emerging
For most Australian electricity distribution networks, peak demand generally occurs at times when commercial, industrial and residential loads coincide, usually late in the afternoon during warmer weather. The concept behind “capacity charges” is to incentivise users of electricity to shift their demand away from these peak times to times of the day when the network infrastructure has surplus capacity.
In Sydney, New South Wales (NSW), for example, the peak demand calculation window is currently 3-9pm in the inner suburbs and 4-8pm in the outer suburbs. The “incentive” for customers is to avoid being penalised!
With the growth in variable renewable energy (VRE) generation from sources such as wind and solar, the concept of demand management is evolving. Not only does it make sense for consumers of electricity to shift load to minimise capacity charges, but there are also strong environmental and energy procurement opportunities emerging as well.
Consider the following plot which shows the daily amount of forced curtailment (i.e. the amount of renewable energy generation required to be wasted) to operate Australia’s National Electricity Market (NEM) during the period 1 September 2023 to 30 November 2023. The average curtailment at midday was 2,000 MW, but it peaked at 8,000 MW. Meanwhile, the average price of electricity on the NEM at midday was $0, as shown by the brown line which coincidentally peaked at 6pm, right in the middle of the NSW capacity charge windows.
Electricity is less polluting when VRE generation levels are higher, and this is reflected in the time-varying greenhouse gas (GHG) emissions intensity of the grid. The plot below shows the NSW region of the NEM for the same period 1 Sep to 30 Nov 2023. As can be seen from the green line, the GHG emissions intensity at midday was on average 40% lower than it was at 9pm, even despite all of that solar energy being wasted.
The benefits of adopting load shifting strategies to minimise capacity charges are therefore growing with the emergence of VRE. We find that effective load-management strategies can reduce a building owners’ capacity charges by up to 10%. If combined with smart energy procurement strategies, there is the opportunity to also reduce the retail price paid for electricity by moving demand away from times when retailers must pay high wholesale prices to times when they can get it for free. More attractive load shapes attract more competitive pricing from retailers because their supply costs are lower. The environmental and reputational benefits that come from using renewable electricity that would otherwise be wasted is the icing on the cake!