Mastering Energy Costs: A Guide to Peak Shaving
One of the keys to a business's survival is managing its cash exposure. Energy costs tend to be large expenses for many large businesses. Nearly every, if not all, businesses rely on electricity to power their operations. A business can manage its energy costs through a concept called “peak shaving.” In this blog post, we’ll explore what peak shaving means and how it can be used as a tool for businesses to reduce their expenses. In addition, we’ll cover tangential topics like peak demand management, load shifting, and energy efficiency. So, let’s dive in.
Understanding Peak Shaving
Peak shaving is a savvy strategy utilized by businesses to reduce their electricity expenses. The process involves strategically reducing electricity consumption during peak demand events, known as "peak” times. These peak periods are typically only a handful of days per year when capacity and transmission charges are calculated.
The charges associated with peak times can present a substantial portion of a business’s electricity costs. This makes peak shaving a useful tactic to use in order to manage your energy cost exposure throughout the year. Savings generated during peak shaving can free up cash to return to the business or expand operations.
Why Peak Charges Exist
Electricity providers, like regulated utilities, are typically required to always be able to meet peak demand on their system. Just like a shopping mall has extra parking spaces during peak shopping times like Thanksgiving, energy providers generally need to have resources available to serve peak demand at all times.
For this reason, electricity providers charge businesses for their ability to serve power during peak times. A charge for the utility being on standby is generally referred to as a demand charge. In other words, the utility is charging a business for it to stand by in the event it needs to generate power to meet the demand of all customers at all times.
How Peak Shaving Works
Utilizing peak shaving means reducing one’s electricity usage during peak periods on the electrical grid. This can be accomplished in various ways, including:
Scaling Back Operations: Non-critical businesses (i.e. non-hospitals) can temporarily throttle down energy-intensive operations or production during peak times on the grid.
Utilizing Energy Storage: Energy storage systems like battery energy storage systems charge when the cost of electricity on the grid is cheap and dispatch its stored electricity onto the grid when prices are high, reducing a business's need to buy power when market prices are high.
Smart Grid Integration: Softarwe can optimize a business’s energy usage by observing real-time pricing data and then optimize energy usage around when prices are high and low.
Renewable Energy Integration: Behind the meter renewable energy installations like solar can reduce a business’s need to pull power from the grid during peak usage times.
The Role of Time-of-Use Pricing
Utilities use different pricing structures, one of which is called time-of-use pricing. This means that utilities charge different rates depending on the time the energy is used. In theory, this incentivizes when businesses should use electricity for their operations.
When electricity in the market is high, time-of-use pricing signals to a business not to buy power or reduce usage at this time. Conversely, when electricity prices are low, the market signal to the business is to buy power or increase usage.
Capacity Markets and Peak Demand Management
Capacity markets are in place to ensure the market has enough generation resources to always meet peak demand. Peak shaving can help capacity markets by ensuring that peak demand is held in check because demand on the system decreases during peak demand events.
Electricity providers are paid for the capacity they bid into the market, which is determined by the market. There are solid arguments for the use of capacity markets (i.e. MISO) and no capacity markets (i.e. ERCOT). Ultimately, the end goal should be to ensure the market always has enough capacity or the ability to import capacity when the system needs it the most.
Conclusion
Mastering peak shaving and similar strategies like load shifting and load shedding is a cost-effective move for businesses looking to reduce their operational expenses. By managing energy cost exposure during peak periods on the grid, a business can not only potentially reap substantial cost savings but also help the grid to be more efficient and reliable.
