This paper reviews the concept of peak demand charges on electrical utility bills and provides an analysis of the effect of cool or highly reflective roofs in reducing peak demand charges. The analysis suggests that peak demand charges may account for a significant portion of monthly electric bills across the United States and that cool roofs may provide an equally significant opportunity to reduce these charges when installed on air-conditioned buildings. The analysis also suggests that the peak demand and net energy savings offered by cool roofs are available for both new and existing conditioned buildings in all climates within North America.

Introduction

A sharp peak in electrical demand can be observed in almost every building during the busiest hours of the day. Although a share of this peak may be attributed to equipment used in the building, a significant portion is caused by increased demand for air conditioning in the heat of the afternoon. This peak in demand requires additional power plant capacity, causes imbalances in the power grid, and may result in increased air pollution. But most importantly for the building owner, peak demand may result in monthly charges many times higher than base electrical rates. One of the best approaches to shrink peak demand is to reduce the heat load on a building, especially the solar load that drives the need for air conditioning. And few heat reduction strategies can match the energy-savings potential of modern cool roofing technology.

In an effort to help building owners and designers deal effectively with peak electrical demand charges, this article provides a step-by-step review of all aspects of peak demand, including how to identify peak demand charges on a typical commercial electrical bill, how to estimate the potential savings achieved when installing a cool roof, and how to achieve other business and community benefits associated with reducing the peak energy demand. This information may be especially important since few articles to date on building energy savings have adequately addressed peak demand issues.

How Businesses Pay for Electricity: Base Use and Peak Demand

Although it may be convenient to focus simply on the bottom line of an electric bill, monthly electricity costs are composed of two distinctly different types of charges. The first is base energy use, which measures the total quantity of electricity supplied for the billing period. The second is peak energy demand, which measures the highest amount of power supplied at any one time within the billing period. Base energy use is measured in kilowatt-hours (kWh), while peak energy demand is measured in kilowatts (kW). One way to help understand the relationship between base energy use and peak demand load is to use the analogy of an odometer and speedometer in a car. As illustrated in Figure 1, the base amount of energy used (kWh) can be compared to miles driven as shown on the odometer, while peak energy demand (Kw) would be similar to the top speed driven, as shown on the speedometer.

Like the highest speed achieved during a trip, peak demand seldom occurs for more than a few hours or fractions of hours during each billing period. Typically, peak demand charges are based on the amount of energy consumed in a specified period of time known as a demand interval. Demand intervals are usually 15 or 30 minutes. To calculate a customer’s demand, the electric 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, the hours cancel, leaving kilowatts (kW) as the units of peak demand.

Peak demand charges are a relatively new phenomenon in electric billing, but the concept of peak demand is closely related to a number of well-known electric power failures in the United States, including the state of California in 2000 to 2001 and the city of Chicago in 1995. In both of these cases, peak demand for electricity during prolonged heat waves exceeded the capacity of the electric grid, causing frequent brown-outs as well as occasional complete failure of the electric grid. In response to the severe effects when peak demand exceeds the capability of the electric grid, governments and utilities began to look for ways to reduce peak demand. This in turn has led to the incorporation of demand charges in many utility bills. As a result, many electric utilities across the United States now incorporate some level of peak demand charges in their monthly bills. To provide an example of how widespread the practice of peak demand billing has become, a simple Google search for “understanding peak demand” will generate links to peak demand charge information from electric utilities in California, Florida, Illinois, Indiana, Maryland, Massachusetts, New York, Ohio, and Pennsylvania. As an additional example, the U.S. Utility Rate Database¹ maintained by the U.S. Energy Information Administration identifies hundreds of utility companies across the United States that currently incorporate peak demand charges in their monthly bills, especially for high-use commercial and industrial customers.

Base Use Versus Peak Demand: Looking At Your Electric Bill

Because electricity is not easily stored, utilities must have adequate capacity to meet customers’ maximum requirements, both for the quantity of total level of base energy needed and for the highest level of peak demand required. As a result, commercial and industrial electric rates across the country frequently are designed to cover the cost of providing both base and peak energy. However, identifying these two cost components on the average commercial electrical bill may be a little difficult, especially when most bills are subdivided into a large number of special fees and adjustments. Figure 2 shows a typical commercial electrical bill containing both base use and peak demand charges, as published by an Indiana-based electrical utility².

Near the top of the sample bill, monthly base energy use (circled in green) is shown to be 56,780 kWh. In the detail section of the bill, this base energy use is multiplied by a base energy charge as well as additional charges for fuel adjustments, demand side management (DSM) fees, regional system operator adjustments, and reliability adjustments. Altogether, these base energy use-related charges (also circled in green) add up to a total monthly base use charge of $0.033 per kWh.

However, this base fee accounts for less than half of this total monthly electric bill. Also near the top of the bill, peak demand (circled in red) is shown to be 120 kW. In addition to the base use fees discussed previously, the 120 kW of peak demand is multiplied by a basic peak demand charge plus additional demand-related charges for coal gasification adjustments, pollution control adjustments, emission allowances, and clean coal adjustments. Altogether, these peak demand-related charges (also circled in red) add up to a total monthly demand charge of $20.10/kW.

After calculating base use and peak demand charges, we also may calculate the total electricity rate for this customer. For this bill, the total monthly charge is divided by the 56,780 kilowatt hours used, yielding an effective rate of $0.075/kWh, or over twice as much as the nominal base usage rate of $0.0330. It should be noted that this total electric usage rate of $0.75/kWh is actually among the lowest commercial rates available in in the United States. According to the U.S. Energy Information Administration, average electric rates by state for commercial users in 2013 ranged from a low of $0.07/kWh in Idaho to a high of $0.15/kWh in New York³.

As illustrated by this sample bill, peak demand charges may account for a significant portion of a business’s monthly electrical costs. As a consequence, building owners frequently are interested in learning how these costs may be reduced, especially through the use of energy-efficient building design and operating strategies.

How Can You Reduce Peak Energy Demand?

As mentioned in the introduction to this article, peak energy demand for the majority of buildings occurs in the late afternoon, as occupant and building heat loads also tend to crest. For commercial facilities operating primarily during normal business hours, a number of key factors may help reduce the daily demand peak for electrical power. First, the ubiquitous use of electrical equipment in modern buildings may add to both base and peak demand for electricity. Electrical equipment may include motors associated with manufacturing operations as well as office equipment such as computers, copying machines, etc. Reductions in peak equipment demand may be achieved through the elimination of unnecessary equipment or by using equipment with improved electrical efficiency.

Excessive amounts of indoor lighting also add to base and peak electricity requirements. As a consequence, reducing the amount of lighting used during peak periods can be a useful strategy to reduce peak demand. Reductions in peak demand related to lighting can be achieved by reducing ambient lighting levels and installing task lighting, supplementing electric lighting with daylighting from windows and skylights, and installing more efficient light fixtures using fluorescent or LED technologies.

Although improvements in equipment and lighting may help reduce overall electrical demand, an important driver of peak demand in many commercial buildings is related to the spike in air conditioning requirement loads during the heat of the afternoon. Similar to equipment and lighting loads, peak air conditioning loads may be reduced by improving the efficiency of air conditioning systems or simply by turning up the thermostat. However, peak demand for air conditioning also may be addressed by reducing the impact of climate-related thermal loads on the building. In the case of air conditioning loads generated by high outdoor temperatures, overall air conditioning demand can be reduced by installing additional wall and roof insulation and thermally efficient doors and windows. But a certain amount of the peak in daily air conditioning demand is related to the direct rays of the sun rather than outdoor ambient air temperatures. This means that reducing solar loads by reflecting solar heat away from the building may offer one of the best ways to reduce peak electricity demand in modern buildings.

Fortunately, we have a well-developed and effective technology available today to help reduce solar loads in buildings: the reflective or “cool” roof. Cool roofs use a highly reflective surface to direct a significant portion of solar heat of the sun away from the building. Unlike a dark or non-reflective roof surface that absorbs and transfers solar heat into the building, a light-colored, reflective roof surface reflects and drives solar heat away from the building and into the atmosphere.

Cool roofs also are available using a wide variety of roofing technologies, including single-ply membranes, cool surfaced modified asphalt systems, metal roofing panels, and a wide variety of roof coatings that may be applied to many different roofing surfaces. However, for any of these roofing products be “cool” by today’s standards, the minimum percentage of solar heat reflected away from the building typically falls within a range of 0.50 (50 percent) to 0.70 (70 percent), depending on the particular standard being applied and on the aging of the sample tested. Table A provides a brief summary of these new and aged reflectance percentages for three of the most-recognized building codes and standards.

Because cool roofing has become a very popular roofing choice, roofing manufacturers typically identify the reflectivity of their products in technical data sheets and brochures. In almost all cases, these measures of roof reflectance are based on standards developed by the U.S. EPA EnergyStar program⁵ or the ANSI/CRRC-1 cool roof standard developed by the Cool Roof Rating Council⁶. In addition, both the U.S. EPA and the Cool Roof Rating Council maintain online databases where you can look up the initial and aged reflectivity of many roofing products.