Beware of the optimistic energy rate!

In our blog posts, we have talked a lot lately about electricity rates.  For this post, I also want to step onto my soapbox and shout out a warning about energy cost savings for energy efficiency projects at a commercial or industrial scale.

As part of my work calculating energy efficiency incentives, I often see proposals from vendors selling high-efficiency air compressors or chillers or variable speed drives.   They usually go something like this:

Installation of a new model [name] compressor will save 156,300 kWh per year.  At your current electricity rate of $0.121 per kWh, this is an annual cost savings of $19,000!  With a total project cost of $86,500, your new compressor will pay for itself in only 4.6 years!

I sigh every time I see this.  Here’s why.

The vendor probably looked at the site’s utility history to find out their electricity rate.  Here’s one such history from a facility I worked with:

Electricity billing history - sample

If you pay $416,088 for 3,422,957 kWh, that is an average all-in cost of $0.121 per kWh.  I agree with the vendor so far.

But let’s look at the facility’s rate structure.  It falls under the SC-3 – primary tariff in National Grid’s territory in Upstate New York.   According to that tariff in December 2011, here are the individual charges that make up each bill:

Summary of rate tariff charges

The facility pays flat fees for the first 40 kW of demand and for distribution/delivery regardless of demand or usage—as long as the meter is hooked to the grid and the site is operating, these fees will stay exactly the same.  So $976 of each month’s bill will not change no matter what happens in the air compressor plant.

It gets worse – let’s look at the supply and demand charges.  The new compressor in this case had a maximum demand (kW) at full load that was almost identical to the old compressor.  The energy savings didn’t come from it being more efficient at full load, but instead from it being more efficient at part load.  This meant that the facility’s peak demand before and after the upgrade would be about the same.

So the new compressor wouldn’t eliminate any of the flat monthly fees, and it wouldn’t change the demand charges, either.  Only usage-related charges would be affected.  Let’s look at the rate again and mark up what charges will and won’t be saved:

Summary of rate tariff charges

Red charges cannot be saved for this project; green charges can.

Totaling the lines in green, the incremental cost savings are $0.072 per kWh. That’s not even close to the $0.121 per kWh that the vendor used.   In this case, it would be my job to tell the facility that the actual annual cost savings are $11,254, not $19,000, and the project payback is 7.7 years, not 4.6.  Ouch!

My point is that the average all-in rate that you pay for electricity might not be the same rate that you save when you put in an energy-saving project.   If you have an equipment proposal on your desk, you should ask if the energy cost savings are based on an incremental rate (i.e., the part of your electricity rate that a project can actually save).  If there are both demand and usage savings, check that these cost savings were calculated separately.   It will make your cost/benefit decisions more accurate.

As Sara has pointed out in the rate tariff posts, it’s worth the trouble to find your rate tariff and try to understand it.  These are sometimes hard to find in the dusty corners of a utility’s web site—and even tougher to slog through—but a quick call to your utility can help when you have questions. Of course, you could also look into getting some outside help, too.


About Clair Hessmer


Clair Hessmer, PE, CEM, is a chemical engineer by training. She frequently works with industrial energy efficiency projects, as well as boiler replacement and cogeneration feasibility studies. Clair is part of Antares' New York office.

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