Electric Demand Management Strategy


This paper presents a discussion on the topic of Electric Demand Management as it relates to electric tariff rates, new power generation, and incentives to curtail peak usage.

Peak Electric Demands are a significant component in the cost of electricity requiring large capital investments and operating expenses for generation equipment that is required to operate only during the peak of the summer air conditioning season.

The production of electricity must closely match the usage for the electric grid to remain stable. In the summer when the outside temperature exceeds 90 degrees F the demand for electricity can be 80% higher than on a pleasant 65 degree spring day. Generators must be standing by, often in a mode called “spinning reserve”, to insure that as the air conditioners are turned on there is enough power available.

Electric power generation equipment is very expensive. The high efficiency natural gas system costs about $750 for each kW to construct. A sophisticated clean coal or nuclear power plant can cost upwards of $4,800 per kW to construct. In addition, because interruptions of electric power are so devastating there must also be back-up power ready in case the primary power plant has a failure.

  Thomas Mort received the 2003 Society of Automotive Engineers International Environmental Award.    

A Utility Model

To support this discussion a model has been developed using typical load profile, weather, and user data for South Texas. This model will demonstrate peak demands and their relation to weather and will be used to support discussion on actions which can be taken to reduce the need for expensive new power generators.


From this table you can see that the difference in peak demand between a hot summer day and a cool spring day is 4,500 – 2,400 = 2,100 MW/hr. This is the amount of extra power that can be attributed to air conditioning. You can also see that the top 20% of the peak demand which is equal to 900 MW/hr only occurs 784 hours per year or 10% of the time. For this discussion we will concentrate on this 900 MW/hr which is equal to a typical sized large power plant.

To have power generators available to meet this 900 MW at a cost of $750 to $4,000 per kW would cost $675 million to $3.6 billion to build and we won’t even consider the backup power. For this discussion we will use a value of $1,500 per kW.

The Effects of Temperature on Demand

The following graph depicts the relationship between the temperature and the power generation based upon hourly data for a one year period beginning January 1 and ending December 31. It is important to remember that during the spring and fall when the temperatures are moderate most energy using activities are ongoing with the exception of air conditioning. Factories, schools, homes, stores, and restaurants are still using power. Air conditioning is the primary reason for the increase of over 2,000 MW per hour.

Dividing this peak of 900 MW evenly among the 700,000 customers would mean that each customer would need to reduce peak demand during this period by 1.3 kW/hr. Since the cost of a kW is $1,500 this would mean $1,950 could be spent for each customer to reduce this peak.

  A review of large commercial electric users, such as malls, grocery stores, resorts, hotels, hospitals and universities, found that the per unit cost of electricity does not play an important part in their decision-making process for locating in a particular city. Electricity also takes a smaller percent of their total income as compared to residential customers.    

Tariff Structures and Incentive Programs

The utility company can encourage customers to use less power during peak times through a tariff structure and incentive programs. A large commercial or industrial user will have two types of charges for power. One is the energy or kWh used and the other is the demand or peak kW that are used during a one month period. For this example a large user is charged $0.04 per kWh for energy and $8.00 per kW for demand.

A residential or small commercial will have a simple $0.09 per kWh charge.


If the large user implements actions to reduce the peak demand by 10% or 150 kW by operating equipment outside of the peak period he will receive a benefit of $8.00/kW per month x 150 kW x 12 months or $14,400. (Remember $8/kw x 12 months = $96/kW per year)

Demand Response

Another incentive is called Demand Response. In this program large users can contract to reduce a certain amount of kW during peak times. They are typically paid $20 per kW for this reduction and it is limited to a set number of times per year. ($20/kW x 10 occurrences/yr = $200/kW per year) A review found a 0.3% improvement in overall peak demand reduction from this program due to a small number of participants.

If the small user operates equipment outside of the peak period he will receive no incentive.

An incentive typically offered to residential users is a demand controlled thermostat. This device will shut down the air conditioning unit for 20 minutes of each hour during peak demand periods between 3 and 7 pm. The incentive paid to the residential customer is the free installation of the thermostat and the savings of electricity that comes from reduced use of the air conditioner and accepting a slightly higher in house temperature of 1 to 2 degrees F. (6.0 kW/hr x 1.33 hours per day x 100 days per year x $0.090/kWh = $72/year.) This program helps to reduce the utility demand by 2 kW. ($72/2 = $36/kW per year) A recent review found about a 3% participation in this program.

In this model the majority of the energy users are residential and small commercial. They pay up to a 50% premium cost for electricity; they receive less than 40% of the benefit to operate out of the peak demand period; and they pay a larger percentage of the cost toward capital investments in new power generation.

A review of large commercial electric users such as malls, grocery stores, resorts, hotels, hospitals, and universities found that the per unit cost of electricity does not play an important part in their decision making process for locating in a particular city. Electricity also takes a smaller percent of their total income as compared to residential customers.

The typical incentive programs are paying $36 per kW for the majority of the users and up to $200 per kW for the largest users yet the cost for new generation is in the range of $750 to $4,800 per kW.

  A detailed study of 102 industrial facilities over a six-year period has validated the ability to reduce peak demands by 20% with investments under $800 per kW    

Consider a goal to reduce the peak load of our model system from 4,500 MW to 3,600 MW. At our assumed $1,500 per kW x 900 MW we could spend $1.35 billion to achieve this goal. With 700,000 customers that would be $1,900 per customer to reduce 1.3 kW of peak per customer.

Allowing inefficient equipment and untimely use of power to justify building, maintaining, and fueling 900 MW of power plants can be considered irresponsible management of money, resources, and the pollution of our environment. The pollution related to 900 MW of power for 784 hours per year at 1.587 lbs/kWh is 560,000 Tons of emissions per year or the annual emissions of 68,000 cars.

A restructuring of the tariff rates would be a reasonable first step. The period of peak demands occurs May through September primarily in the afternoons from 3 to 7 pm. This would be the time that electricity should be most expensive. Other countries in Europe and also in Mexico have understood this concept for many years and have applied a high demand charge during this period. Increasing the demand charge from $8.00 per kW to $24.00 per kW would increase the incentive to implement actions to reduce peaks. To counter the increased cost should be an incentive of $1,500 per kW to help fund projects which would reduce the peak.

Since a majority of the customers are residential and small commercial it is imperative to create a program of peak demand reduction that also applies to this group and not only the large users. Reducing the peak demand at residential facilities by 1.3 kW with funding of $1,500 per kW is a feasible task including the metering which is required for verification and long term sustainability.

The small residential users, usually the lowest income group, currently pay the highest cost for utilities compared to income. The typical method of increasing rates by a flat percentage of the cost per kW penalizes this group the most. A tiered approach following an analysis of the base requirements to maintain a small residence should be applied to provide the lowest rate to the smallest low income user.

A detailed study of 102 industrial facilities over a period of 6 years has validated the ability to reduce peak demands by 20% with investments under $800 per kW.

Analysis of residential and small commercial facilities in South Texas has found the reduction of 1.3 kW peak demand per facility to be feasible with average investments under $1,000 per kW.

Applying the methodologies used in the analysis of the above mentioned industrial and residential facilities to review the historical utility bill data from the utility’s data base would allow targeting of the highest potential candidates towards meeting the target of 900 MW peak reductions. Based upon the statistical data less than 50% participation in the program would accomplish the goals.

The success of these types of programs is dependent upon having a set of pre-packaged solutions with quantity pricing discounts, a method for measurement and verification, easy access to funding, and education of service providers and end users.

Public awareness is key in the management of peak demands. It is suggested that education of the public through forums, flyers, and a daily tracking and reporting of the electric demand trends in local papers be included in a comprehensive demand management program.


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