Understanding Demand Charges Part 2: What you need to know and why?
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Mar 23, 2022
Presented by ChargePoint

In this article, the second in a two part series, we dive deeper into why demand charges slow down progress with EV charging and climate action more broadly

Demand charges cause high payment premiums and unease amongst charging station operators. ChargePoint discusses the current factors in play and what is currently being done to overcome the challenge.

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This article is sponsored content presented by ChargePoint.

In the first part of this series, we explained what demand charges are and touched on some of the ways they can be a barrier to businesses looking to install charging stations or electrify their fleets. In this article, we dive deeper into why demand charges slow down progress with EV charging and climate action more broadly. 

Why we need to understand demand charges

As more EVs hit the road in Canada over the next decade, the need for charging infrastructure will grow. With concerns about access to charging ranking among prospective EV drivers’ top concerns, we must ensure there is sufficient charging infrastructure to meet Canada’s zero emissions vehicle targets.

As we explored in the first part of this series, to bolster investment in EV charging —especially fast-charging — changes must be made in how utilities design their electricity rates to accommodate EV charging. 

The key to this is reforming demand charges.

What is the impact of demand charges?

According to a 2019 analysis by Great Plains Institute for Sustainable Development (GPI), “A DCFC [DC fast charger] operating between 50 kW and 350 kW… will likely incur demand charges, especially if two or three vehicles are charging simultaneously. Even if this only happens once in a month, the operator will get billed for a very large demand since this charge is based on the peak use occurrence for each billing cycle.”

For a number of public fast-charging locations across Canada, it can be difficult for a business to offset high demand charges by billing drivers for charging. 

As an example, let’s take a charging site in Ontario that has two 50 kW fast-charging stations, used three times a day for 25 minutes per session, on average, over the course of a year. If the station operator charges $0.35 minute to EV drivers, total revenue collected would be ~$8,500. However, total energy costs would be ~$10,000 (~$3,000 for the actual energy delivered and ~$6,400 for demand charges). In this case, demand charges would represent 60 per cent of total energy costs and 75 per cent of revenue. Leaving little revenue to cover other operating costs and amortized capital costs.

Even in a region like Vancouver that leads Canada in EV adoption (15.6 per cent in the third quarter of 2021), demand charges are an issue. Analysis from the City of Vancouver submitted to the B.C. Utilities Commission indicates that demand charges were 62 per cent of monthly electricity costs in 2020-2021. For areas with lower levels of EV adoption, like northern, rural or remote areas, these costs can be even more of a challenge. 

Demand charges lengthen the time for business to receive a return on their investment, and can weaken the business case to the point where investment simply doesn’t happen, in some cases. The impact is that critical investments in EV charging may be deferred or delayed, working against the targets set by Canada’s governments.

That’s why policymakers, regulators and utilities across North America — from Quebec and California to Alberta and Colorado — have come up with flexible and innovative rate designs that encourage and support necessary investments in the electrification of transportation. 

How some utilities are changing the game

Utilities across the U.S. and some in Canada are offering new rate designs in support of EV charging and as alternatives to traditional, demand-based electricity rate structures. 

In the US, over 30 utilities — including Eversource Energy(Conneticut) and Dominion Energy (Virginia) — have introduced innovative rates that support EV charging investments. And Massachusetts passed a law in January 2021 requiring all utilities in the state to offer alternative demand-based rate structures to facilitate fast-charging for all vehicle types.

In Canada, just a few utilities have introduced innovative rates to support EV charging. In Alberta, ATCO established a temporary rate to support EV charging investments in the province. ATCO customers with separately metered fast-charging stations with loads no greater than 500 kW, can opt into the D23 rate. Rather than define rates based on demand, the D23 rate converts the demand component of the electricity charge into an equivalent energy-based charge (per kWh). This means that ATCO customers that invest in EV charging have electricity costs that scale with utilization. Hydro-Québec has introduced a similar EV charging rate, the Experimental rate BR, for all DC fast chargers with loads above 50 kW, while BC Hydro has introduced two optional rates for fleet charging. 

Electric mobility is a critical component of climate action and EVs will be the dominant technology moving people and goods across the country. Investments in charging infrastructure made today are critical to a successful transition to EVs. The question now becomes how we best support these investments and ramp up charging deployment across the country to the levels needed to meet Canada’s zero-emission vehicle targets.

Incentives and grant programs like the federal Zero-Emission Vehicle Infrastructure Program and Electric Vehicle and Alternative Fuel Infrastructure Deployment Initiative that leverage private investment have been and will continue to be essential to early deployment. In fact, the federal government reports that it has supported over 17,000 chargers to date and has committed to another 50,000. 

As the need to accelerate charging infrastructure deployment and to fill in the gaps grows, we must deploy additional tools to support investment. Innovative rate structures that address demand charges are a demonstrated and effective mechanism to do so. And we will need all the tools in our toolkit. 

What can utilities and governments do in Canada

The Canadian federal, Quebec and B.C. governments have all committed to phase out combustion vehicles by 2035. Private businesses with large fleets — including Walmart Canada, Canada Post, and Loblaws and transit agencies like Toronto Transit Comission, Translink, Société de transport de Montréal — have committed to aggressive sustainability goals that will require rapid fleet electrification.

Significant investments in infrastructure will be needed if these commitments are to be met, and utilities and government have a timely opportunity to help ensure these investments happen. Drawing on the experience described above, innovative electricity rates can be an effective way to address one of the biggest barriers to EV charging investment.

As we take the next step towards an all-electric transportation future, Canadian utilities and governments should take note of what has worked and consider how they can help unlock more investment in EV charging. 

And as they consider how they can support investment with alternative rates, they should ensure they consider rate design that:

  • Supports all EV charging use cases;
  • Is sustainable, and doesn’t create significant cost shifting across other classes of customers;
  • Balances electric utility costs while also supporting the EV charging use case; and
  • Considers the benefits of additional EV charging load. 

The first part of this two part series on Demand Charges can be viewed here.

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