Electricity Pricing in a Nutshell -By Kenny Oladipo

Electricity pricing has two cost components: demand cost or charge (kW) and energy cost or charge (kWh). Demand cost is the cost accrued by the customers for demanding electricity at the same time at a particular time of the day. Energy cost on the other hand, is the actual cost of the electricity consumed by a household or business on appliances, lighting and equipment. Demand-related charges usually represent 30 to 70 percent of most commercial customers’ electricity bills.

Demand is a measure of the rate at which energy is consumed. The demand an electricity company must supply varies with the time of day, day of the week, and the time of year. Peak demand seldom occurs for more than a few hours or fractions of hours each month or year, but electricity companies must maintain sufficient generating and transmission capacity to supply the peak demand. Demand charges represent the high costs that electricity companies pay for generating and transmission capacity that sits idle most of the time. Demand charges are based on the amount of energy consumed in a specified period known as a demand interval. Demand intervals are usually 15 or 30 minutes.
To calculate a customer’s demand, the electricity company takes the demand interval with the highest energy consumption in kilowatt hours (kWh) and divides by the length of the demand interval in hours. Mathematically, this is expressed as kilowatt hours per hour. The hours cancel, leaving kilowatts, the units of power or demand.

For example, if the total of all charges on customer’s monthly electricity bill based on kilowatt hours is 3.3 cents per kilowatt hour. All costs based on kilowatts total $7.37 per kilowatt. The demand interval is 15 minutes.

Suppose you use a 100–watt light bulb during customer’s 15–minute peak demand interval. The demand charge will be:
($7.37/kW)(100 W)(kW/1000 W) = $0.74.

The energy charge for using a 100–watt light bulb during any 15–minute period of the month is:
($0.033/kWh)(100 W)(kW/1000W)(15 min) (1 hour/60 min) = $0.00083.

It costs just as much to operate a 100–watt light bulb during the 15–minute peak demand interval as it does to operate the same 100–watt light bulb for 223 hours any other time during the month. The 223 hours equals 1 month of use at 10 hours per day and 22 days per month.

Calculating the cost per kilowatt hour during the peak demand interval further illustrates the high cost of demand charges. The cost of operating a 100–watt light during the 15–minute peak demand interval is $0.74.
$/kWh = $0.74/(100 W)(kW/1000 W)(15 min) (1 hr/60 min) = $29.60/kWh.

Compare a cost of $29.60 per kilowatt hour (demand charge normalized for equivalent energy charge) to customer’s rate schedule, just 3.3 cents per kilowatt hour.

When you try to save money, you should focus most of your efforts on the most expensive items. The same approach should be used when trying to lower utility bills. The first step is to analyze your utility bills and understand exactly what you are paying for. Unfortunately, electricity bills are often complicated and confusing. Demand and consumption charges sometimes vary with the time of day, day of the week, and the seasons. Some utilities have “ratchet” charges where the highest demand or consumption that occurs in one year will determine demand or energy charges for the next year (estimated billing). Even so, it is usually possible to summarize your bill into a demand charge (dollars per kilowatt) and an energy charge (dollars per kilowatt hour).

If the utility company is unable to supply the demand, they may be forced into a brownout (where the utility reduces the voltage), or the utility may use rolling blackouts (cutting all power to some customers for a period). If you were billed just for consumption, you would have no monetary incentive to reduce your peak demand. Because you are charged for demand, it is extremely helpful to know the monthly peak demands for a typical year, your demand profile for the day your peak demand occurred each month, and if possible, the daily peak demands for the entire year.

The average cost per kilowatt hour has been traditionally used to estimate costs. This cost is calculated by dividing the total annual electricity bill by the total annual kilowatt hours. If you are evaluating a load that is not on continuously when the building is occupied, the impact on the facility’s demand will probably be the same as if the load were on continuously. The impact on consumption will be proportional to how long the load is on. This causes demand charges to be higher than average for the energy consumed. The actual cost per kilowatt hour consumed by the load is higher than the average cost per kilowatt hour.

Any night or weekend, energy consumption (off peak) will cause the average cost per kilowatt hour to be lower than the actual cost during peak periods on workdays, because the demand charge for energy consumed off the peak is low or non-existent.
If you are evaluating the cost of energy consumed at night, such as security lights, you should use only the cost per kilowatt hour from the utility’s rate schedule. The average cost per kilowatt hour will include a demand charge. Peak demand almost never occurs at night, on weekends, or on holidays.

Estimating costs using the average annual cost per kilowatt hour will not give accurate results when the load is seasonal, and the rates vary with the seasons. For example, air conditioning may be used only during the summer, so it is important to use the summer rates. If the cost per kilowatt or kilowatt hour varies with demand or consumption, the unit cost of the load that triggers higher rates can be tremendous, because the new rates can be applied to the portion of the bill over the triggering amount, to the entire bill, or to all bills for the next year. In any of these cases, using the average cost per kilowatt hour for the previous year will drastically underestimate the actual costs.
In the Nigerian electricity market situation, customers living in areas where steady supply of electricity of 20 hours or more per day is guaranteed would incur higher demand cost and this scenario may have prompted recent hike in tariff for Band A customers. In countries where 24/7 electricity supply is a given, the demand charges are spread out to all customers, invariably lessening the burden for every user. Because only a section of the customer pool gets sustained electricity supply in the country, the burden is heavily tilted.

The truth is, hike or no hike in electricity tariff, the DisCos are underperforming, as even the most basic parameters like distribution of pre-paid meters to all users have not been achieved after over a decade. A burdensome increase in rates for customers is unlikely to improve electricity distribution in the country, and the government needs to revisit their contracts. DisCos aren’t too-big-to-fail entities in the electricity supply value chain; hence, their overbearing influence on the market can be derated. Government can achieve this by leveraging the huge debts (100 billion naira by January 2024 estimates) owed by DisCos to downgrade their 100% equity into minority stake entities not holding more than 25% equity in the distribution framework of the power value chain, except they can generate fresh investments into the sector on their own. AMCON can take over the debts and then relist the remaining 75% to entities that can absorb 50% equity or more by bringing fresh investment into the sector, and this move would be both legal and pro-market. This idea isn’t atypical, as France is doing something similar by taking full control of EDF (an electricity distribution company) that is drowned in debts.

Also, the GenCos may be given an opportunity to hold up to 10% stake in the DisCos that they supply if feasible. Otherwise, let GenCos have franchisees in the retail electricity market that can operate as bulk dealers/buyers for niche markets. This concept would mimic the automotive industry template, with OEMs supplying their vehicles directly to dealerships having franchises with them.

To address the infrastructure gap in the sector, the National Assembly should consider enacting a law that empowers CBN to compel commercial banks to use unclaimed funds that are trapped in closed accounts or dormant accounts in the last 10 years or more to finance power projects at single digit interest rates. Trillions of naira are in limbo in those bank accounts in the banking system and CBN needs to shake those funds loose to boost investment in the power sector.

Another way to improve the electricity situation in the country is to adopt a prosumer and consumer exchange. This concept creates a platform through which domestic consumers or commercial/industrial consumers can also sell excess electricity generated back to the microgrid. These entities now become the prosumers. Many manufacturing companies in industrial estates across the country generate own electricity to power their operations. The excess wattage they produce can be aggregated to provide electricity to adjacent communities at reasonable rates. Households with solar panels that can supply more electricity than they need, can sell the surplus-to-requirement electrons to their neighborhood as well.

To boost the power generation capacity of the country itself, federal government can consider SMRs (Small Modular Reactors) to be stationed at offshore locations to reduce any safety and security concerns and submarine power cables laid to bring the electrons onshore. SMRs are advanced nuclear reactors that have a power capacity of up to 300 MW(e) per unit, which is about one-third of the generating capacity of traditional power reactors. SMRs are generally safe and can produce a large amount of low-carbon electricity, as they are physically a fraction of the size of a conventional nuclear power reactor. Making it possible for systems and components to be factory-assembled and transported as a unit to a location for installation. Some SMRs are designed to operate for up to 30 years without refuelling and use microreactors that rely more on passive systems and inherent safety characteristics, such as low power and operating pressure. This means that in such cases no human intervention or external power or force is required to shut down systems, because passive systems rely on physical phenomena, such as natural circulation, convection, gravity and self-pressurization. These increased safety margins significantly lower the potential for unsafe releases of radioactivity to the environment and the public in case of an accident. The SMRs can be mounted on vessels or offshore platforms and anchored at areas where the wind direction is towards the oceans as secondary safety measures. The SMRs must be under federal government ownership and then commercialized after installation. Tennessee Valley Authority in the US is a notable example of this type of ownership framework.

To lower the overall cost of power generation in the country, it is important to onboard cheaper power generation options like hydropower, renewable energy (especially solar) and SMRs into the energy mix. The way the economics of power generation works is that the cheapest energy source dictates the pricing for the market. So, the more power generated from hydropower the lower the cost per KW(e) across the power generation spectrum. This reality makes a strong case for the completion of the Mambilla Hydropower project in record time. Gas fired power plants account for about 70% of the total power generation in the country, and gas price is expected to continue to rise which will undoubtedly impact the direction of electricity pricing in the country. Boosting power generation sources to reduce the outsized role of gas fired power plants is a strategic necessity and should be aggressively pursued.

Kenny Oladipo,
@kindodey,
Houston, TX.
A Senior Reliability Engineer and Consultant in the Oil & Gas, Energy and Manufacturing Sectors with academic training in Mechanical Engineering and Law.

Kenny Oladipo has been Inducted into the Prestigious Marquis Who’s Who Biographical Registry (24-7pressrelease.com)

Reference:
Dave Dieziger: Saving Money by Understanding Demand Charges on Your Electric Bill.
www.IAEA.org.