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Demand Charges: The Hidden Roadblock to EV Charging Buildout

The once distant allure of an electrified world has been met with the uplifting reality that this paradigm shift is alive and well underway. Questions about the feasibility and benefits of electric vehicles have been replaced outright with how quickly more vehicles and infrastructure can be rolled out. From the days of General Motors’ EV1 experimental vehicle of the late 1990’s, to Tesla’s $40,000 Model 3 with its rabid fan base and 12 to 18 month waiting list; electric vehicles and their associated infrastructure are the new reality of our time. 

While consumers may rightly be focused on plummeting electric vehicle costs and technology innovation, it’s the growth of public DC fast charging stations (DCFC) that are worth a closer look. The proliferation of more DCFC stations will further drive vehicle adoption rates more than nearly any other single factor. It will be the relationship between electric utilities and the site operators of DC fast chargers that will further incentivize more stations to be built at market rates that can be both profitable to the operator and reasonably priced for the end user.

One mechanism for making this happen is the intelligent use of rate design and demand charges. Responsible in some instances for up to 90% of the bill, demand charges levied at DC fast charging stations, according to the Rocky Mountain Institute (RMI), can have an outsized impact on EV drivers and the buildout of critical infrastructure.

Demand Charges and Pricing

EV drivers of today can choose from essentially 3 modes of charging; at home, at work, or at a public charging station. “Level 1” charging at home means plugging your vehicle into a standard home outlet. “Level 2” chargers work up to six time faster than Level 1 charging and can be found across homes, offices and public charging areas. But DC fast chargers available at today’s public charging stations reigns supreme delivering 100 – 200 miles of range per hour according to ChargePoint. State-of-the art technology just starting to hit the market can deliver up to 1,000 miles of range per hour depending on the capability of the vehicle’s battery system. While time of use (TOU) rates that some utilities use to incentivize charging at off-peak times can shape the longer-term load associated with workplace and residential charging (Level 1 and some Level 2), TOU rates are not a means to mitigate demand charges. Instead, it is the drivers and site-operators of on-demand DC fast charging station that are most directly impacted by demand charges.

To start, legacy electricity rate structures were not designed for the operation of DC fast charging equipment. In fact, these structures can create a barrier to the operation of these stations. Utilities then, have vital role to play in determining which rate structures work best for driving further electrification investments.  According to the RMI, EV adoption rates on a compound annual growth rate basis have been around 30-40% in recent years so there’s not a shred of doubt that the initial momentum is there. But for the electrified infrastructure to truly coalesce, and for societal benefits to be realized, changes will need to happen behind the scenes. “For the benefit of the system and for customers, you have to solve the fast charging problem.” says Brendan Jordan, Vice President at the Great Plains Institute. GPI’s core mission is the de-carbonization of the transportation sector.

One way to approach the fast charging issue, is through the rates drivers pay to charge their vehicles. Charging rates can be a convoluted concept for even the most tuned-in of electric vehicle early adopters.

According to RMI’s comprehensive “From Gas to Grid” report, the per mile cost to charge an EV in a representative sample of 5 US states ranges from a high of $0.22/mile to a low $0.03/mile. The per mile fueling costs of a gasoline vehicle range from $0.13/mile to $0.09/mile. Not only does this demonstrate parity between the two, but in some states such as Texas, DC fast charging per mile costs are lower than per mile gasoline costs. EV drivers should know that charging station prices and the related cost per mile are based on several factors.  These include the region the charging station is in, what specific type of DCFC is in use, which utility is supplying the power (an IOU or municipality) and which tariff structure is in use. In some cases, demand charges are part of that tariff, and can have market distorting influence on prices. 

“Good rate design has to do with performance based regulation. If you want good outcomes, then it really starts with rates,” says Chris Nelder, Manager, at the Rocky Mountain Institute.  Utility rates and tariffs aren’t just a vital part of what drivers pay but the profits that charging station operators can achieve.  This in turns helps drive investment dollars into additional charging stations in the quest for more infrastructure. What then really is a demand charge and why does it seem to be the biggest behind the scene factor that few people have heard of?

Demand charges are special charges based on the peak rate of electricity consumption in a month which are applied in addition to the cost of the actual electricity itself.

“Demand charges help cover the cost of the upstream investment, to cover the cost of load spikes at the center. They were meant for industrial customers and serve a purpose, to give users a signal that they should lighten up on the load and come up with a flatter demand,” says Nelder. In RMI’s research of charging station rates, Nelder confirms why these charges can have such an outsized role on the entire bill. 

As charging stations begin to multiply in number, it’s important to keep in mind that not all of them are as well utilized as others. This may be because a station is too new or in an infrequently trafficked location. The utilization of charging stations in more rural areas for example may still lag even when EV adoption becomes more widespread “You can’t talk about demand charges in isolation, it’s a combination of what the demand charges are at a utilization rate,” he says. The demand charge issue is more prevalent at DC fast-charging stations that are “high power - low utilization” that don’t have a large number of vehicles charging at the location frequently enough. This is a concern for the latest public DCFCs, and less for level 1 and 2 charging setups at home or at the workplace.

 

“The particular ones we (Rocky Mountain Institute) analyzed had low utilization rates, with some only in use 10% of the time and as consequence of that, the demand charges made up perhaps 90% of the bill. This was really an unintended consequence of a conventional rate design meeting a spikey load, because utilization rates on the chargers are low.” RMI’s research is as comprehensive as it is startling. Rates analyzed are from RMI’s analysis of data from every 2016 charging session from all 230 of EVgo’s DC fast charging stations located in California.

“If the utilization rate was 50% the demand charges would be less of an onerous problem. As the utilization of vehicles charging at a particular charging site increases, and through greater energy consumption, this allows for better recovery of costs.”

Even 15 minutes of use during peak time during a given month can already incur steep demand charges whereas some utilities use 30 minute windows.  Other utilities make use of ratchets. Here, the highest peak of the year can set a minimum threshold for the other months in the year, typically some percent of their highest peak (i.e. 70%). As far as who truly pays for these excess charges however, the answer also varies. The owner operator may eat the entire cost of demand charging without passing them on to the actual driver. In other cases, drivers end up footing a portion of the bill increase.

Charging station giant EVgo for example, does not expose customers to varying prices. Though RMI still recommends that varying wholesale prices be passed on to customers to give them a clear signal on when a good time to charge is and which times are less than ideal. 

The variation continues when it comes to how utilities set rates for EVs. For an Investor Owned Utility (IOU) to go through a rate change related to electric vehicles it’s a longer more drawn out process involving the Public Utility Commission. It may take years to be approved. With a “muni” or co-op the process is more streamlined as the utility generally has a smaller coverage area and is accountable to a smaller stakeholder group. Utilities of all types have rate payer groups that are concerned that the power consumed to charge electric vehicles is a cost burden that those who don’t own these vehicles should not have to shoulder. Overall rates and corresponding demand charges at IOUs are often higher than muni’s and co-ops. The rates can be over $25/kW-month for some of the investor owned utilities.   With a DC deployment of just 100kW, that results in > $2,500 per month in demand charges alone before the site owner pays for hardware, installation, energy and other recurring costs. 

“Austin Energy is a muni that is very progressive in its various offering for chargers and they have a whole suite of programs for EV drivers,” says Nelder. They offer an initially discounted program of $4.17 a month for unlimited charging at any of their public charging stations. In addition, through their Austin Energy rebates, drivers can get discounts on faster 240v charging stations for their homes.

What’s Driving the Push

DC fast chargers are no longer just a nice-to-have, but are being propelled forward by a growing market need.  As the battery range of new EVs grows, more DC fast-charging stations will be needed to accommodate these vehicles. It may sound counterintuitive, but the greater the battery range of upcoming EVs, the greater the expanses they’re able to travel to and the more support they’ll need to continue to expand their driving network. According to GPI’s Brendan Jordan, “Having the ability to take that longer road trip is ultimately what will dictate whether some will buy an EV.” Today there are a small number of vehicles that support fast charging besides Tesla. Those include a handful of vehicles like the BMW i3, Volkswagen eGolf, and the Nissan Leaf. Due to the more limited range of these aforementioned vehicles (less than 120 mile range) these vehicles are not currently relying much on fast charging and the charging station utilization of these models is relatively low.  The Chevy Bolt has a higher range but right now only accommodates fast charging up to around 55kW. But with range increases and new vehicles on the horizon, there will be many more DCFC-ready cars on the road. A handful of forward thinking utilities are stepping up to accommodate that influx of vehicles. Southern California Edison’s five-year freeze on monthly demand charges will help deemphasize the role of these charges in the bill during which time the utility will recover costs through energy charges. Demand charges will then be phased in at the end of the 5-year introductory term, according to RMI’s Gas to Grid report.  

The infrastructure is also being spurred on in some unforeseen ways. Volkswagen’s “dieselgate” fiasco is now directly contributing to the growth of electric vehicle charging stations.  As part of its settlement with the California Air Resources Board and its new Electrify America initiative, the company plans to invest $2 billion over the next 10 years in zero emission-vehicle infrastructure and education programs in the U.S.  $800 million of that amount will be invested in California and $1.2 billion invested across the rest of the United States. RMI estimates that the first of four 30-month, $300 million investment cycles could result in about a “50% increase over the number of DCFC charging ports that exist nationally today, as well as a slight increase in the number of Level 2 chargers,” according to their Gas to Grid report. If the final three investment cycles were similar to the first cycle, the total number of DCFC charging ports nationally could be double the roughly 5,700 ports that exist currently.

As egregious as the Volkswagen violations have been, several other manufacturers including Fiat Chrysler, General Motors, Daimler, Audi, Renault, PSA Group (the maker of Peugeot and Citroen cars), Porsche, and Bosch have all been accused of similar cheating activities. According to Nelder, if those companies were also held liable and forced to make infrastructure investments as Volkswagen has been, it could result in a very significant increase in the number of available charging stations in the United States.

The Deployment of Infrastructure

What then should be the strategy for deploying EV infrastructure and what can utilities do to make their rate design and demand charges act as an enabler rather than an obstacle? One strategy is to not just build out infrastructure, but to overbuild it and make sure that public peak times are covered. It’s also important to understand that increased demand on the grid is a good outcome for utilities, when managed intelligently. An intense need for more DCFCs means that utilities, regulators, and site operators should focus on locating charging stations in a way where they will act as effective grid assets. This will incentivize more frequent use, which creates a profitable and sustainable business outcome. Greater utilization in turn, will lessen the portion of the bill made up of demand charges. 

Brendan Jordan, of the Great Plain Institute believes that EVs will provide a net beneficial load. “Electric vehicle revenues will be great for utilities and will exceed the cost to serve them. They will help on the curtailment on renewables. The benefits of EVs will exceed the costs once they scale up and put downward pressure on rates.” 

For Jordan, effective utility rates and the demand charge issue can be addressed in different ways. Off-peak charging is key, “Moving charging times to off-peak times is a good idea and there are apps out there to make sure it happens. So that you’re not charging at 6pm and more towards 11pm. 90% of charging will be off-peak if we design things correctly.”

Changes to utility rates structures will also play a role, “We need changes to the way we charge. Instead of dinging them for 15 minutes have them pay for the system that they actually use, it’s like charging people for water based on the size of the pipe that’s delivering it into their home instead of the amount they’re actually using,” says Jordan.

Like so many aspects of the EV infrastructure question, there’s no one-size-fits-all solution to rate and demand charge design. What may work in a particular region or for a particular utility may not be effective somewhere else. Part of this is due to the relative infancy of the charging market. “The current patchwork network of vehicle charging infrastructure in the U.S. is still small enough and young enough that we lack sufficient data and rigorous analysis to answer many of these questions,” according to RMI’s Chris Nelder and the Gas to Grid report. A more effective approach then, is to pilot different rates programs with varying demand charge thresholds to determine which ones meet electrification goals most efficiently.

In Massachusetts, lawmakers today are working to pilot rate structures more in line with electric vehicle charging. House Bill 3742 – An act relative to electric vehicle expansion was filed by State Representative Thomas A. Golden, Jr., the House Chairman of the Joint Committee on Telecommunication, Utilities, and Energy. Golden’s legislation would require Massachusetts utilities to file pilot commercial tariffs with the Department of Public Utilities that feature alternative rate structures, that among other things, dampen the impact of demand charges. These pilot rates will help to facilitate faster charging for light-duty and heavy-duty vehicles for assessing the benefits and costs associated with various charging rate designs.

Unsurprisingly, when it comes to the thresholds at which demand charges kick in; that too varies greatly by utility. Pacific Gas & Electric (PG&E) lowered the threshold for demand charges to 75kW from 200kw last year.  This makes installing more than a single 50kW fast charger on site much less appealing.  Some utilities do not have demand charges until the load is 499kW or greater.  This will help to encourage greater adoption of DC fast charging in these markets.  As vehicles that charge at higher rates come on the road over the next year, even 499kW will not be a low enough demand charge threshold for installations with more than a few DC fast chargers.  Along with the “overbuilding” of infrastructure, it’s important to have enough redundant charging at each location so drivers can count on a charge during high usage periods or times where one or two chargers may not be working.

Some like San Diego Gas & Electric (SDG&E) and Southern California Edison (SCE) have taken an even more progressive approach and proposed a temporary demand charge holiday altogether.  “The theory is let’s take demand charges off the charging stations until the market matures, to get to a higher utilization rate, and then scale them in without killing the goose that’s laying the egg,” says Nelder. 

But demand charges rates and thresholds should align with market conditions at charging stations themselves. A better approach to configuring demand charge pricing is to look at the actual utilization of charging stations and scale demand charges up or down accordingly, rather than trying to guess when charging station utilization will be high enough to support a demand charge. 

Societal Benefits

            In America and across the globe, broad commitments to EVs are becoming more clear and decisive. The French and British plan to ban all internal combustion vehicles sales by 2040. In China, a specific date for such a ban is soon to be proposed, and in progressive California, a bill is to be introduced in the state assembly by January 2018 that would ban the sales of cars and trucks with ICEs by 2040. Predictions from Investment Bank UBS are that US EV sales will rise to somewhere between 640,000 to 800,000 per year by 2021 with Tesla selling 250,000 of them. For these forecasts to come to fruition, utilities will have to actively partake in charging station rollouts and smart rate design.

            Intelligent policy decisions at the state and federal level can bring everything together by offering a tax credit to company’s putting capital to work installing charging stations, or a tax equity opportunity for those investing in the charging stations. “A key question is affordability of charging to the end user, and the affordability of running it at the site host level through smart rate design,” says Chris Nelder. “A lot of the incentives we’d want, to support charging rates, would be done at the state level, creating incentives to support private sector charging companies to build in our state, and give tax credits to companies making incentives.”

            If the electric vehicle movement can make the grid more efficient, reduce unit costs of electricity while boosting the share of renewables then there’s a lot to like about the future unfolding before us. Massachusetts State Representative Thomas A. Golden Jr., sums it up best, “Electric vehicles are in our future and charging stations will be as common as the gas station on the corner. That’s why it’s important now to have conversations with stakeholders to get the infrastructure and rate design right, which is why I filed my bill to accelerate the expansion of electric vehicles.”

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