Understanding Demand Charges Part 1: What are they and why they need to change
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Mar 9, 2022
Presented by ChargePoint

Expert analysts have big expectations for electric vehicles (EVs) in 2022. BloombergNEF predicts that global sales will surpass 10.5 million this year, about four million more EV sales than in 2021.

ChargePoint sheds light onto the factors affecting charging costs. Photo: ChargePoint

This article is sponsored content presented by ChargePoint.

Expert analysts have big expectations for electric vehicles (EVs) in 2022. BloombergNEF predicts that global sales will surpass 10.5 million this year, about four million more EV sales than in 2021. 

Why? There are more models than ever on the market, more jurisdictions introducing the phase-out of combustion vehicles, and more fleet electrification commitments from global brands. Perhaps, most notably: consumers want EVs. 

However, the decision to go electric does, in part, depend on consumers’ ability to access charging. The Canadian government understands this important linkage. The federal Minister of Environment and Climate Change, Steven Guilbeault, is unequivocal in that the government’s goal is to increase EV chargers across the country to ensure access to reliable charging is not a barrier to Canadians going electric. 

As part of its mandate to transition to 100 per cent zero-emission vehicle sales by 2035, the federal government has committed to provide $700 million to help deploy an additional 50,000 electric vehicle charging and hydrogen refuelling stations.  

This infrastructure — be it home, workplace, public and depots charging, or Level 2 or fast charging – is crucial to this electric mobility revolution.

One of the hidden roadblocks to electrification is how utilities price electricity —including outdated “demand charges” that penalize investments in EV charging, especially fast charging, when utilization is low. Luckily, utilities and governments can address this issue.

Whether it’s a business installing fleet deport charging, a gas station installing fast charging, or a municipality installing public charging, there are essential how’s and why’s to know about electricity costs and demand charges.

To shed more light on demand charges and the ways utilities and governments can fix them, we have developed a two-part series for Electric Autonomy Canada. The first section will explain what demand charges are and how they impact investments. The second will dig deeper into demand charges and actions utilities and governments across North America have taken to address them.

What are demand charges?

At the core: the demand-based component of commercial electricity rates—or “demand charges”—can drastically impact an EV charging investment’s bottom line.

Demand charges are based on peak power usage rather than overall energy consumption, and were originally designed to help electric utilities pay for the cost of providing energy when utility customers — like factories — utilized an energy load above certain levels. Most commercial electricity rate structures that include demand charges were designed for industrial and commercial users at a time when EVs did not exist. 

Demand charges are triggered when there is a spike in energy use that reaches a high level of capacity, typically above 50 kilowatts (kW) in Canada. In the context of EV charging, a demand charge could be triggered when an EV driver uses a fast-charging station. As demand charges are based on peak power, use of a fast-charging station, even just once a month, can push a charging site to its peak energy load and trigger demand charges. 

How are demand charges calculated?

Demand charges are based on a customer’s peak power consumption during a short interval of time (usually the highest 15-minute average usage each month), measured in kilowatts (kW). 

Unlike total energy use, which is based on kilowatt hours (kWh), demand charges can be hard to predict as they depend on the amount of utilization or the types of loads at a customer’s location. For example, businesses cannot always predict how many drivers will use each of their charging stations in a month or how many of those drivers will be charging at the same time. Demand charges can add up quickly for business customers— recent analysis from fast-charging operators in B.C. suggests that demand charges can be as high as 80 per cent of their total electric utility costs. Analysis from the US finds that demand charges can represent between 30 per cent and 70 per cent of EV charging operators’ energy bills in a year

Most of today’s electricity rate structures were not designed with EVs in mind, so it is not surprising that they do not accommodate charging, much less the fast-charging needed to support highway travel or heavy-duty fleet vehicles, like electric transit and electric school buses. These rate structures also don’t reflect the load characteristics or overall benefits that EVs can offer the grid, when managed effectively. 

This is especially true when it comes to fast charging, which is subject to demand charges and typically has lower utilization during the early stages of EV adoption. When fast chargers are used less frequently, demand charges can make up a significant portion of electric utility and operating costs. Also, lower utilization means less revenue to offset these costs.

In sum, traditional commercial electricity rate structures with demand charges discourage many businesses from offering charging services or considering electrification, especially if they expect that overall utilization will be relatively low in the near term. 

If we want to embrace the electric mobility future in Canada, electricity rate structures must change. 

Why utility electricity rate design needs to change

Demand charges create a Catch-22: due to their structure, the business case to install EV charging can be challenging, but, at the same time, absent adequate access to charging, consumers and fleets may not feel confident buying an EV.

Although demand charges are complicated, it is important for businesses and government to understand what they are and how they can be redesigned so investment in EV charging isn’t undermined. Delays in addressing this issue will delay deployment of critical charging infrastructure and make it harder to achieve Canada’s zero-emission vehicle targets.

In part two of this series, we will dig deeper into demand charges, explain how demand charges are slowing down investment in EV charging, and share some examples of how governments and utilities are rising to the occasion and finding solutions to the demand charge challenge.

To read part two of this series, click here: Understanding Demand Charges Part 2: What you need to know and why?

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