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Understand Demand Charges and Slash Your Electricity Bills

Electricity bills for industrial sites typically contain a number of cost elements, but of these the most important are energy charges and demand charges. Energy charges are proportional to the amount of energy consumed (in kWh), but can also vary based on when the energy is used (so called “time-of-use”) and the time of year (seasonality), depending on the tariff structure for the site concerned. Demand charges can be independent of energy consumption, and are based on a transient condition as measured over the billing period. Demand charges typically apply to larger industrial sites.

Maximum or “peak” demand, measured in kVA, refers to the highest level of demand measured over a billing period. It may be measured as an average over a short time period, typically 15 minutes – the precise approach used by your utility should be confirmed. Utilities are interested in maximum demand since it determines the size (and hence the cost) of the infrastructure required to supply power, as well as its reliability and maintenance requirements.

So how do we arrive at this peak? Every machine that consumes power on an industrial site will contribute towards the total power consumption of the site at any point in time. As machines are switched on and off, this cumulative power level will change. It will also change as a result of the specific demands made on a machine. For example, a milling machine will consume more power when milling a “harder” material than when milling a “softer” material. There is a point in time during each month when the power requirements of the site reach a maximum, and this peak is then used to determine the demand charges for the month. The thing to realise is that the peak occurs only once, but will appear on your monthly bill, even it was due to atypical, temporary circumstances. Worse, demand levels can also be used to determine the quantum of other cost elements on your bill, such as network access charges, for example. Minimising this peak is therefore a pursuit deserving of attention.

Maximum demand concerns the peak in apparent power consumption, which is the real power consumption divided by the power factor for a site. Inductive machines, such as motors, some types of heating systems and the ballasts for some types of lights tend to have a power factor that is less than unity. The power factor for such machines can also vary as a function of load. For these machines, apparent power levels (in kVA) would be higher than real power consumption (kW). Resistive machines, such as resistive heating elements or incandescent light bulbs have a power factor of unity. Hence for these types of equipment, real and apparent power are equal.

Given the above, a number of strategies for reducing demand charges become apparent:

  • First, take the time to fully understand your tariff structure, and then evaluate whether there are opportunities to access lower charges by changing how operations are managed. For example, maximum demand tariffs may not apply at certain times of the day, in which case it may be possible to operate some large energy users during these times and benefit.
  • Second, can loads be spread out more to reduce the peak? To implement this strategy (called load shifting) successfully, heuristics would need to be established and strictly implemented, and it is also possible to engineer this into the operation using automation or hard-wired interlocks that prevent specific machines from running at the same time.
  • A third strategy is that of increasing levels of energy efficiency, since the more efficient a machine is, the lower will be its peak power requirement. This will reduce real and apparent power levels. Note that this is not always the case, so you need to assess individual demand reduction opportunities based on their individual merits. Increasing the efficiency of an electrically heated system through the use of insulation may have no effect on demand, for example.
  • The fourth strategy is to reduce the difference between real and apparent power levels. This can be achieved by using capacitors, which form part of a power factor correction system. Power factor correction reduces reactive power and increases the power factor of a load (making it closer to unity), and hence reduces the maximum demand for a site. Local capacitors can be used for individual pieces of equipment, but a more typical approach is to install a packaged system to correct the power factor for a group of equipment or an entire facility.Generally a number of steps are installed that are switched in and out in response to the reactive power of the system being corrected. A fundamental point about power factor correction is that it is the power factor at maximum demand that is of interest. A low power factor during periods of low demand will not result in a higher demand charge.

Reducing demand charges is generally achieved through an integrated approach that uses all of these individual approaches. Investments in power factor correction should generally be the last option to consider, since load shifting can significantly reduce the size and cost of the ultimate system required.

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