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Making the Case for Peak Defection and Why Utilities Should Care

“Grid Defection,” a term popularized by the Rocky Mount Institute in their report Economics of Grid Defection, has caused some trepidation among utilities executives taking a long-term look at their industry. However, little has materialized to date that gives reason for major concern. Instead, we are starting to see some selective defection during certain points of the day, specifically among non-residential customers. A term for this more near-term threat might be “Peak Defection.” Driving this movement are the improving economics of large scale energy storage, more sophisticated energy management systems, and legacy tariff structures. An additional tailwind is that intermittent renewables and energy efficiency measures are further driving up peak prices in many areas of the US (EIA).

Why is this phenomenon important? One reason is that uncoordinated Peak Defection could cause more problems for the grid and make an efficient distributed energy future harder to obtain.  Another reason is that a lot of utility revenue is at stake, and tough changes to how they recoup that revenue may be necessary. However, if regulators and utilities work with their large customers to the benefit of both parties, Peak Defection can both lower power costs and increase grid stability.

Utility-installed (in-front-of-the-meter) energy storage is becoming a more common tool for addressing grid problems. Business cases supporting energy storage for grid-facing peak shifting, T&D deferral, renewable integration, ancillary services, etc. are making energy storage’s potential impact more clear. Less straight-forward, however, is how behind-the-meter (BTM) customer-facing energy storage deployments will impact utilities, especially given the tariff-structure incentives that are baked into how Commercial and Industrial (C&I) customers are billed for electricity.

When BTM energy storage is deployed with the utility as an active partner, (e.g. through companies like Stem, Advanced Microgrid Solutions, Green Charge, Enbala, Greensmith and others), it can benefit both the utility and the ratepayer. In these cases, deployment is geographically strategic and needs-based, and the utility typically has access to – and/or control of – the assets. The focus is generally on reducing generation capex and supporting the grid.

But when energy storage is deployed by C&I groups independent of the utilities, it can become an asset for the ratepayer at the expense of the utility. The C&I segment represented 62 percent of electricity consumption in the U.S. in 2016 according to the EIA, and demand charges can represent 30 to 70 percent of a C&I customer’s monthly bill. These demand charges can be greatly reduced with energy storage and strategic load-shifting. Utilities have not yet felt the pain of revenue losses from demand charge reductions, but these losses will start to add up as awareness and C&I energy management sophistication improves.

But wait, isn’t lowering demand during peak periods a fine result for both the ratepayer and the utility? Answer: it’s not necessarily good for the utility. Utilities must build and maintain the grid to meet peak demand, not average demand. Natural gas combustion turbine peaker plants cost $700 to $1000/kW to build, even though their capacity factors are typically less than 10 percent. The tariff structures in place for C&I customers were developed to recoup some of those capital costs through demand charges over time. Thanks to economic energy storage, those revenues may never materialize, which will leave the utilities scrambling to change tariff structures to make up the revenue, and potentially angering their customers.

Demand charges vary greatly across the country, but a recent NREL study showed that over 5 million commercial customers have at least $15/kW demand charges and thus could benefit from energy storage. That number includes 3 million commercial customers with demand charges of $20/kW or more.

To be sure, changes in tariff structures can address the challenges that C&I peak defection will bring, but tariff changes that create winners and losers are rarely popular, they take time to implement, and they hurt customer satisfaction.

Long-term, addressing peak demand with energy storage is a good thing. Short-term, expect turbulence as C&I Peak Defection will happen as sophisticated, large energy consumers try to lower their bills and meet sustainability goals. Falling energy storage and solar costs will further accelerate the defection.

Only through customer-supplier aligned incentives can the grid fully plan for — and leverage — all the benefits that energy storage has to offer. To get out ahead of Peak Defection, regulators and utilities need to expand efforts to incentivize C&I customers to work with them instead of acting independently. This could be in the form of special tariff structures that give utilities access to customer-sited energy storage or by allowing BTM utility-owned energy storage that also provides economic or operational benefits to the C&I host. Regardless, as the grid becomes more decentralized and two-way, C&I assets should be a part of the strategy to attain a more efficient and lower carbon energy future. Once that happens and Peak Defection is addressed, utilities can turn their attention back to the larger issue of Grid Defection.

Lead image: Chart with a peak. Credit: DepositPhotos.