How High Residential Demand Charges Could Slow the Growth of Rooftop Solar

In recent months, utilities have worked to put in place a policy that could slow the growth of rooftop solar: high residential demand charges. An electric bill with a large demand charge can limit the cost savings of solar energy because just one interval of high peak demand – at night or on a cloudy day – can result in charges that undercut the financial benefits of generating solar power over the course of an entire month.

Gideon Weissman

Former Policy Analyst, Frontier Group

This blog post is an exerpt from Lighting the Way 4: The Top States that Helped Drive America’s Solar Energy Boom in 2015. See the full report for sources and additional information.

Rooftop solar energy is changing how consumers obtain power and how utilities manage the grid. Some utilities have started to embrace these changes by envisioning new business models appropriate for the energy system of the 21st century. Others, however, have reacted by trying to slow the growth of rooftop solar power, including by adding extra monthly charges on solar energy owners, increasing the fixed charge component of residential customer energy bills, reducing credits for solar energy under net metering policies, and restricting financing options like third-party solar ownership. In recent months, utilities have worked to put in place another policy that could slow the growth of rooftop solar: high residential demand charges.

One of the main benefits of rooftop solar energy is that it lets consumers use less electricity from the grid, resulting in a lower electric bill that offsets the cost of solar panels. Demand charges change this calculus, as they are based not on electricity use, but on peak electricity demand for a short (typically 15 to 60 minutes) period over the course of a month. An electric bill with a large demand charge can limit the cost savings of solar energy because just one interval of high peak demand – at night or on a cloudy day – can result in charges that undercut the financial benefits of generating solar power over the course of an entire month. Furthermore, increases in demand charges can lead to reductions in net metering benefits for solar customers. Because new demand charges are often accompanied by reductions in the retail volumetric rate of electricity, and net metering compensation is typically based on this retail rate of electricity, demand charges can indirectly reduce the benefits received by solar customers for the excess electricity they feed into the grid.

Solar panel owners faced with demand charges can take steps to reduce their overall demand, including through energy efficiency or by installing energy storage. These steps have been used by large commercial and industrial electric customers, who long have been subject to demand charges reflecting their higher energy demand and thus the greater investments that must be made in the grid to serve them.

Nevertheless, in territories where large residential demand charges have been implemented, solar energy growth has stagnated. In April 2015, the Salt River Project instituted a demand charge equaling approximately $29 per month on its net metering customers. In the 11 months before the demand charge took effect, the number of net metering customers grew by 4,500; in the 11 months afterwards, the number grew by barely a third of that, despite the continued rapid fall in the cost of solar energy systems.

After the Salt River Project Utility Implemented Demand Charges, Rooftop Solar Growth Stagnated (red shading indicates period since demand charges took effect)

Now, other utilities are looking to implement similar demand charges. In 2015, at least 13 utilities proposed new demand charges. Two Arizona utilities, Arizona Public Service and Unisource Energy, are requesting demand charges that would affect solar customers as of June 2016. As of April 2016, regulatory approvals for demand charges were also pending in Oklahoma and Texas. And in Illinois, Commonwealth Edison (ComEd) supported state legislation that would have introduced a mandatory residential demand charge.

Authors

Gideon Weissman

Former Policy Analyst, Frontier Group