Can Solar Help Me Avoid Demand Charges?

In this blog post, we are going to take a closer look at demand charges and the impact that an on-site solar PV system may have upon them. While many people simply assume that their measured demand will be reduced by the average output of the PV system, they are often disappointed to find that this is not the case. The amount by which solar PV systems reduce demand charges are influenced by a variety of factors and we are going to explore several of them in this post where we will take a close look at a customer behind Southern California Edison (SCE). 

As a quick refresher, SCE determines demand, in kW, based on the maximum 15-minute rate of consumption. For rate TOU-8, demand is measured on a 24x7 basis to determine the facilities demand charge and separately measured during the mid-peak and on-peak periods to determine the demand charges for these respective periods. The on-peak period only exists during the summer months of June - Sept. The graphic below shows a screenshot of an SCE invoice and identifies each demand charge. 

As you can see, the on-peak demand charge during this billing cycle is significant at $22.99/kW and even a modest reduction in on-peak demand will yield significant savings. Since the SCE on-peak period is defined as noon - 6pm on summer weekdays, you'd think that solar PV would be a sure thing to reduce this charge. Sometimes it is.......and sometimes it isn't as we'll see below. The first graph below shows a month where the solar PV system performed consistently and reduced the on-peak demand by about 500 kW from what it otherwise would have been. Given current on-peak SCE demand charges of $25.33/kW (June 1 2014 tariff), this reduction of 500 kW would yield a savings of $12,665 for this billing cycle. Note how this load profile is classic "Duck Curve" and how easy it is to distinguish between weekdays and weekends. 

The X axis shows hours 1 - 24 and the Y axis shows hourly kWh usage. Each line depicts the hourly load for a given day of the month and the legend to the right shows the line colors associated with each day.

The X axis shows hours 1 - 24 and the Y axis shows hourly kWh usage. Each line depicts the hourly load for a given day of the month and the legend to the right shows the line colors associated with each day.

The graph below shows July '13 where a couple of cloudy afternoons ruined the demand charge savings for the month. You can see a handful of days where the load rebounds between 3 - 4pm to about 2,900 kW when solar output is diminished due to cloud cover. Although there are still some savings relative to where the load would be without solar PV, the savings in demand are significantly less than the average output of the PV system.

The X axis shows hours 1 - 24 and the Y axis shows hourly kWh usage. Each line depicts the hourly load for a given day of the month and the legend to the right shows the line colors associated with each day.

The X axis shows hours 1 - 24 and the Y axis shows hourly kWh usage. Each line depicts the hourly load for a given day of the month and the legend to the right shows the line colors associated with each day.

As this example demonstrates, even when a utility has an on-peak period that coincides with solar PV output, demand charge savings will still exhibit a high degree of variability from month to month. As a result, savings from demand should be treated as extra gravy, but the basis for any financial analysis around behind the meter PV has to be driven by avoided kWh charges. These are more certain (presuming your solar PV system works properly) while reductions in demand can be fickle.

If you have questions about this stuff, call us.

Does My Solar Project Require a Payment in Lieu of Taxes (PILOT)

In Massachusetts, the answer is maybe and it all depends on who owns the system and how it is interconnected. M.G.L. c. 59 Sect. 5, Clause 45 (scroll down to forty-fifth clause) states that solar and wind powered devices are exempt from property taxes for a period of 20 years from the date of installation. The Massachusetts Dept. of Revenue has interpreted the statute to apply to all systems owned by the end use consumer of the energy output and interconnected on a "behind the meter" basis. The DOR provides a nice write-up of their logic in the March 2012 City and Town Newsletter.

I've noticed that many solar developers in MA seem to push a direct connection to the grid as opposed to a behind the meter connection. With a direct connection, the solar output is exported to the grid and the value of the output is assigned to the host customer via net metering credits. Developers tend to prefer this because direct connections can be easier from a technical standpoint and because direct connections also offer more arbitrage opportunities regarding the rate assignment that determines the value of the net metering credits (e.g., NGrid G1 vs. G3). What these developers often sweep under the rug is that direct connections require a PILOT and the PILOT negotiation process varies on a town by town basis.

Any solar system that is owned by a third party and/or connected directly to the grid will be subject to a PILOT agreement. For any system owned by a third party, it doesn't matter if the host customer is a public or private sector entity. There are three ways that the PILOT payment can be determined: the cost approach; the comparable sales approach; and the income capitalization approach. Since there are few comparable sales of completed solar arrays, the choice for new systems is really between the cost approach and the income capitalization approach. There are risks to each method due to the variability in the income streams associated with electricity avoided costs, net metering credits, and Solar Renewable Energy Credits (SRECs.). When negotiating a PILOT, success is defined as achieving a manageable PILOT that will not negatively impact project economics or be large cost burden in the future if the financial performance of the solar array is worse than anticipated.