For utilities, electricity is generally more expensive and complex to deliver when demand is high. To help cover these costs, California’s utilities have traditionally imposed Time-of-Use (TOU) rates, which created a daily schedule that applies different prices for power based on demand trends on the grid. When demand is highest, prices are highest under TOU rates.
In the past, daily grid demand ramped up in the morning, peaked from noon into the early afternoon as temperatures and air conditioning usage increased, and then gradually decreased as the day progressed. Though there is some additional nuance to the scheduling, California’s utilities have long scheduled on-peak hours—during which rates were the highest—from around 11 am to about 6 pm. Off-peak hours, meanwhile, were generally applied through the other hours of the day.
For utilities, TOU rates helped increase revenue to cover the high costs of delivering power when demand was high. For energy consumers, this created an incentive to minimize reliance on the grid for power during on-peak hours. This has long been a significant part of the value of on-site solar photovoltaics (PV) for the state’s large energy consumers. The hours when solar generation is at its highest levels happen to coincide with the on-peak hours, enabling large energy users to rely on their on-site solar power and avoid exposure to several hours of high on-peak rates every day.
However, the rise of solar power generation in the state—both Behind-the-Meter (BTM) and at the utility scale—has disrupted the dynamics of the supply mix supporting California’s electric grid. Utilities are adapting to these new realities with changes to their TOU rate schedules, which will have a significant impact on the business case for behind-the-meter solar PV and Energy Storage Systems (ESS).
California’s Utilities Respond to the ‘Duck Curve’
From 2007 to 2017, utility-scale solar power generation in California grew from 557 GWh to 24,353 GWh, according to the US Energy Information Administration (EIA). This rapid increase has created a number of serious challenges for the state’s utilities, which rely largely on natural gas generation to supply the majority of power on the grid.
Solar production increases in the late morning hours and peaks around noon before tailing off in the late afternoon and early evening. This reduces demand for natural gas during the midday hours, when utilities traditionally imposed higher, on-peak TOU rates. Then, as solar power generation diminishes in the late afternoon hours, utilities face a spike in demand for power from natural gas.
California’s Independent System Operator (CAISO) illustrated this trend in the graph above, which is now commonly known as the “duck curve.”
The Duck Curve creates several challenges for utilities. The first is accommodating the late-afternoon spike in demand. This often requires a reliance on natural gas peaker plants, which can generate power quickly but are expensive to operate on a regular basis. Compounding the cost problem is that much of this early evening spike in demand falls outside of the traditional on-peak hours when utilities could expect to make up the high cost of delivering power.
In addition to the high costs, the reduction in midday demand has depressed a traditional source of revenue for natural gas generators, while high levels of solar production have decreased electricity prices, sometimes leading to negative prices. For utilities, TOU rates helped increase revenue to cover the high costs of delivering power when demand was high.
In response, California’s utilities have begun adjusting their TOU rate schedules to account for the duck curve. San Diego Gas & Electric (SDG&E) shifted on-peak hours for its summer season to 4 pm-9 pm, from its previous schedule of 11 am-6 pm. Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) implemented the same types of schedules for on-peak hours in 2019.
Under these new schedules, the utilities apply on-peak rates when demand for natural gas spikes in the late afternoon to early evening hours, helping them adapt to the economic realities of the duck curve. For the state’s large energy consumers, meanwhile, the shift disrupts the economics of behind-the-meter solar PV and energy storage.
The Impact of New TOU Rate Schedules on Solar PV and Energy Storage
Under the new TOU rate schedules, peak production for a solar PV system will occur largely during the new off-peak hours at midday. This undercuts the value of stand-alone solar PV as a source for off-grid power to avoid on-peak rates.
To illustrate the impact of the shift in TOU rates on a stand-alone solar PV system, analyzed was a 2-MW solar PV system installed at an office building with $1.2 million in annual energy spend, 7 GWh of annual energy usage, and a peak load of 1.6 MW. The latest TOU rate schedules reduce the value of the solar PV system by 19% over a 20-year period!
However, combining solar PV with energy storage can enable large energy users to use their self-generated power more strategically. If customers can charge an Energy Storage System (ESS) with their on-site solar PV assets during off-peak hours, they can transition their facility onto that low-cost energy during on-peak hours. Distributed energy resources (DER) optimization software facilitates this process, charging the ESS with power generated via solar PV and automatically transitioning the facility’s load onto the on-site capacity available to reduce consumption from the grid when on-peak rates are applied.
Looking at the same building analyzed above, adding a 500 kW/1 MWh ESS with the existing on-site solar PV actually makes up the value that the system would have lost as a result of the new TOU rate schedules. That equates to a difference of about $1.9 million.
The shift in TOU rate schedules will also affect the business case for stand-alone energy storage. Again, DER optimization software plays an important role in managing these costs, automatically charging the batteries at times when power prices are lowest and deploying the power during on-peak hours.
To understand the impact on energy storage, calculated was the value of a 630 kW/1 MWh stand-alone ESS for a food-processing facility with annual energy spend of about $650,000, annual usage of 3 GWh, and a peak load of 1 MW. For this facility, the new TOU rate schedules would increase the value of an ESS by 16%, resulting in more than $3.1 million in total value over a 20-year period.
Looking Ahead: The Long-Term Value of Energy Storage in California
The change in TOU rate schedules came as a result of a fundamental shift to a more renewable-heavy power generation mix. As the fundamental market dynamics behind the electric grid evolve, energy storage and distributed energy resources (DERs) will become increasingly important to help large energy users adapt to these market realities and brace for the impact.
For example, the rise of electric vehicles (EVs) in California threatens to disrupt the grid. In 2017, EV sales in California reached nearly 95,000, up 28.5% from the year prior and considerably higher than the next closest state, New York, which saw just over 10,000 in sales of EVs in 2017, according to data from the Alliance of Auto Manufacturers and IHS Markit. Large energy users in California could see multiple challenges as a result of the rise of EVs.
Grid-level challenges: How will the rise of EV charging affect the grid? What new challenges will energy providers face, and how will those challenges affect energy consumers?
Facility-level challenges: As EV charging becomes a necessity to integrate on-site—whether to charge a fleet of EVs owned and operated by the company or to provide an amenity to customers, tenants, or employees—how will the equipment affect the facility’s load profile and energy costs?
Energy storage and DERs position customers need to adapt to these kinds of new developments seamlessly. The ability to store and deploy power on-site, whether generated via on-site resources or sourced at times when grid costs are at their lowest, enables energy users to manage their reliance on the grid strategically. TOU rates are an important part of the equation, but they are far from the only way California’s energy consumers can create value by maximizing their flexibility with DERs. Additionally, the gradual decrease in incentives for DERs in California makes it important for those in California who would benefit from DERs to act soon. The Self-Generation Incentive Program (SGIP) offered by California’s Public Utilities Commission (CPUC) will diminish over time, leaving less incentive capital available as more customers take advantage of the program in the next few years. Additionally, the investment tax credits for DERs are set to decrease from 30% in 2018 to 10% by 2021. Today is the eleventh of 15 installments of the 15 chapters of the second edition of ENERGY Cost Savings For Facilities, by Corey L. Wilson, that will will be presented each week in this newsletter. Each chapter is approximately 3 to 4 pages long covering essential info every FM should know about concerning energy cost savings for their facilities. If you can't wait until the last chapter, you can purchase the guidebook right now by following the instructions below.
ENERGY Cost Savings For Facilities Available in epub, pdf, and paperback versions for $7.99, $14.99 and $24.99. Excellent resource and textbook for facilities and operatons managers, energy industry professionals, sustainability workforce development, educators and students. CHAPTERS 1 – An ENERGY Savings Introduction For Facilities 2 – Your Facilities’ Electrical ENERGY Future is Now 3 – Electrical ENERGY Saving Systems For Facilities 4 – Potential ENERGY Cost Savings For Facilities 5 – Sustainable ENERGY Buildings Plans For Facilities 6 – ENERGY & Buildings Management Software For Facilities 7 – ENERGY Surveys, Inspections, Audits & Commissioning For Facilities 8 – Facilities ENERGY Benchmarking Using Portfolio Manager 9 – ENERGY Efficient Lighting For Facilities 10 – ENERGY Efficient HVACR Systems For Facilities 11 – California’s Time-of-Use ENERGY Rate Changes For Facilities 12 – ENERGY Code Compliance Measures For Facilities 13 – ENERGY Storage Batteries and Beyond For Facilities 14 – Utilizing an ENERGY Savings Plan Budget For Facilities 15 – Implementing an ENERGY Storage System For Facilities