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Texas Commercial Electric Rates – Demand

The role of electric demand is important in understanding Texas commercial electricity bills.  Electric demand is the rate at which electricity is used.  It is measured in kilowatts (kW) or kilovolt amperes (kVA).  A common analogy is that electric demand (kW or kVA) is like a speedometer while electric energy (kWh) is comparable to an odometer.  In other words, electric energy reflects how much energy the customer consumed while demand represents the maximum rate they consumed that energy.

Texas Electricity Market

Among deregulated retail electric markets, Texas is known for its “energy-only” market structure.  In other states such as New York, New Jersey, Pennsylvania, Ohio, and Connecticut, the electricity markets include an electric demand component in their pricing structure.  In those markets, retail electric rates are significantly affected by the customer’s demand.  In Texas, however, electric demand only affects the delivery (wires) charges and not the competitive energy rate.

Electricity Delivery Charges

Delivery charges are determined by Transmission and Distribution Utility tariffs.  Texas retail electric customers should understand how demand affects their overall electricity bill.  As most Texas commercial customers have smart meters, two demand metrics apply.  First, the non-coincident peak (NCP) demand is the highest demand reading measured during any 15-minute interval during a billing month.  Second, there is the 4-month coincident peak (4CP) demand.  This is the customer’s average demand for the 15-minute intervals corresponding to the ERCOT system peak demand during the months of June, July, August, and September of the previous calendar year.  A good way think of this is that it represents how much the customer contributed to those times in the summer months when the power grid was at its most stressed levels.

Transmission charges are tied to the 4CP demand while distribution charges are tied to the NCP demand.  For distribution charges, the demand used for billing is typically the greater of that billing month’s NCP or 80% of the NCP established in the 11 months prior to the current billing month.  This is commonly referred to as a demand ratchet.

Demand Charge Examples

Contrasting two hypothetical customers can aid in understanding the role of demand in Texas commercial electric bills.  Customer A uses energy in a constant and consistent manner throughout the day.  Customer B is similar but has a process that uses energy at a significantly higher rate for just a few minutes each hour (e.g., a hydraulic press or steel stamping machine).

Customer A uses a constant 20 kW on a 24/7 basis and will consume 14,440 kWh in a 30-day period.  Customer B consumes 10 kW for 23 hours and 100 kW for a total of 1 hour each day.  This customer will consume 9,900 kWh in a 30-day period.

Both customers are served by the same Transmission and Distribution Utility and have the same great electric rate of 10 cents/kWh.  Their bills will differ in two important ways.  First, the customers will pay different energy charges.  For fixed price retail electric plans, the energy charge is simply the amount of kWh used multiplied by the electricity rate.  In this example, Customer A would pay an energy charge of $1440 for the 30-day period while Customer B would pay an energy charge of $990.  This difference of $450 simply reflects their different energy usage amounts.

Second, their difference in demand will also lead to significantly different delivery charges.  Customer A has an NCP demand of 20 kW while Customer B has an NCP demand of 100 kW.  Assuming the distribution charge tariff is $5 per kW, Customer A will be assessed $100 while Customer B would have a charge of $500 for a difference of $400.

Demand Charge Summary

In summary, Customer A pays $440 more in energy charges while Customer B pays $400 more in delivery distribution charges.  This means that the two customers would have comparable electric bills even though their operating and electric usage characteristics are very different.  Selecting a low electric rate for your business will not affect your delivery charges.  Commercial customers, however, should still consider the role of demand in their delivery charges and its impact on their overall electricity bill.

About: Charlie Hewitt

Charlie Hewitt has more than 25 years of in-depth energy experience having served in executive and managerial roles at some of the largest retail energy providers in North America.His expertise covers a wide range of retail energy disciplines including pricing, contracting, risk management, and credit. He holds an MBA from UT Arlington, MA and BS degrees in geology from UT Austin, and was a TXU environmental research fellow.

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