What makes energy so expensive for American companies?

October 20, 2015

As businesses look to trim every last dollar that they can from their operating budgets, business leaders are wrapped up in many questions, and one of them is the reasons behind their high energy costs.

According to Trane, a division of Ingersoll Rand, utility costs are a top five operating expense for most organizations. Energy costs dramatically affect operating budgets with impacts on revenue. Reducing utility costs can help pay for more staff, programs or other resources. But what factors drive the price of power needed to keep their facilities up and running?

Timing matters
One of the most important factors affecting your electricity bill is timing. Businesses should be aware not just of how much energy they use, but more importantly, when energy is used, Facilities Net noted. The reason being that utilities charge a "peak demand" charge, which is based on the highest level of energy used in an 15 minute period during "on-peak" daytime hours. Some utilities like ConEd even have "super peak" hours, making electricity even more expensive during day. But no matter where your business is located, or if you have super peak or peak hours, charges for peak demand may account for 10-70% of your total annual bill. Depending on the local climate, this may be a seasonal phenomenon - in the middle of summer or the dead of winter, employees may have an increased need for energy to power their air conditioning or heat, respectively. During other, more moderate times, they may have lesser needs.

Demand for air-conditioning in particular, means more power plants must come online, driving up the price of electricity. To accommodate the uptick in energy usage for cooling, peaking plants are turned on. However, they are expensive as they are polluting. They are so expensive in fact that up to 20% of the total cost of electricity is attributed to peaking plants running for just 100 hours per year, according to NPR.

Utilities pass on the increased costs to businesses by way of peak demand charges. So companies can make significant cuts to their budgets if they find a way to keep peak demand under control. This means talking a close look at their local utility tariffs to identify when price per kW (peak demand) goes up. Consider hiring a firm to help analyze the tariff and get help predicting when electricity will be most expensive. Then research which technologies, programs or changes in behavior may reduce energy use during these peak demand periods. Have a year's worth of utility bills in order to monitor trends in energy consumption and demand. Finally, wait for the right timing. Lighting upgrades and chiller plant retrofits with thermal energy storage present great opportunities to significantly shave off up to half of your peak demand usage.

Both businesses and utilities benefit from reducing peak demand
Lindsay Audin, president of energy consulting firm Energywiz, explained that both power providers and corporate consumers can benefit from technologies that reduce peak energy demand levels. Rising costs and peak demand have combined to build a "death spiral," and curbing this problem will be a financial blessing for all parties involved.

"A general rule of ratemaking is that rates reflect true costs of service while ensuring sufficient utility revenue to maintain reliability," Audin stated, according to Facilities Net. "Increasing demand rates reflect rising fixed costs, and cutting peak demand is difficult for customers. When customers succeed, however, that may be welcomed by utilities since it helps them avoid future fixed cost investments."

Audin explained that other factors are influencing the rise of energy prices as well. Shortage of natural gas, for instance, due to pipeline constrains have caused prices to spike. New power plants and transmission and distribution infrastructure are springing up, which boosts resiliency in the long term, but in the immediate future, they're expensive to construct. Finally, there's the sluggishness in the economy overall, which drags companies down financially.

For all of these reasons, companies need a way to keep their peak demand levels in check. Energy storage technologies which kick on when price for electricity surges may be a solution here, helping businesses tap into additional resources during their times of need.