Last month, we reviewed how market-based flat power pricing under electric deregulation could actually shorten paybacks of some building automation upgrades that reduce wasted off-peak power. This month, we look at the flip side of that coin: how such flat pricing can actually make some types of hvac and mechanical upgrades a tougher sell.

How Can Deregulated Pricing Get In the Way of a Good Idea?

Under most regulated electric tariffs, commercial and industrial customers see separate charges for their monthly peak electric demand in kilowatts (kW) and their monthly electrical consumption in kilowatt-hours (kWh). As deregulated power vendors pitch their wares, the most common offering involves a flat price for all kWh, with demand charges for generation mixed into them. While demand may continue to be seen separately for the still-regulated power delivery (i.e., transmission and distribution) charges, a big chunk of the demand charge is no longer available as an item that could be trimmed by various electrical or mechanical improvements.

A recent analysis of an otherwise profitable thermal storage system found that much of the potential saving of this option also disappeared. Such systems store cooling at night by making ice when demand charges are low (or nonexistent) and off-peak kWh are cheaper than during the day. Those differential costs make up nearly all the savings that accrue to such a system. In most cases, actual energy use stays about the same (and may, under some circumstances, be slightly higher). Once the cost of all kWh becomes the same, and demand charges are no longer differentiable (except for T&D charges), the dollar savings from thermal storage may be greatly reduced. In the case at hand, a system in a Northeastern city with high demand charges (over $25/kW for summer months) saw its payback period nearly triple, making the rate-of-return too low for the customer to consider.

In another case, the promotion of a two-stage absorption chiller (often a hard sell due to its relatively high cost) over an electric chiller foundered, due again to the disappearance of the peak demand charge for generation. Since the kWh charge was constant (for this customer) during the entire year and the only visible demand charge was for power delivery, there was very little increase in his seasonal power cost to run the electric chiller - and thus only marginal relative savings when running the proposed absorber. When it came to a rate-of-return analysis, the electric chiller option won hands down.

What's An HVAC Vendor To Do?

It always pays to obtain a clear understanding of how a potential customer presently pays for his power, and will do so in the future. There may be some logic to discouraging the customer from entering into an agreement that features fixed pricing, the alternative being to remain on bundled utility service that still features a separate demand charge for generation and different rates for on- and off-peak power.

The power vendor offering flat pricing may also offer a floating price that is sensitive to peak demand during the summer months. In many areas of the United States (especially the Northeast and California), power marketers may incur an "installed capacity" charge at the wholesale level that varies from month to month. Some marketers look for customer loads that can be switched off or reduced when those charges are high, and/or when spot power prices are about to spike. A hybrid chiller plant that includes both electric and gas-driven cooling units offers such an option (assuming the total capacity of the units exceeds the peak cooling load). Under many programs now being promoted to relieve grid-wide high prices, being able to switch from an electric chiller to an absorber could result in the vendor paying the customer for the privilege of requesting that switch.

But what about that thermal storage system? In some cases, it could make more sense to separate that load on a different electrical account and meter, and switch it to a real-time pricing structure (if offered by the local utility). Your customer's utility representative could prove a useful ally to that end. Doing so could offer an overall reduction in the cost of cooling (though with a higher risk if the system fails to perform) by taking advantage of the major differential in on- and off-peak power pricing under such rates. Once again, it pays to chat with the customer regarding how he plans to buy the power that will run the system you are promoting to him. Both of you may benefit from exercising your understanding of how energy pricing is changing.