Chip Silverman is market development manager at FreeWire.
High electricity costs and an antiquated electric grid are slowing the national transition to electric vehicles. A frequently proposed approach to overcome this challenge — eliminating demand charges for EV charging — will ultimately slow the long-term transition to EVs, cause unnecessary strain on the grid and distribute costs to all ratepayers.
According to the federal government’s Joint Office of Energy and Transportation, 182,000 publicly-accessible fast charging stations are needed by 2030 to support EV adoption and meet the demand for charging. Fast charging stations, also known as direct-current fast chargers, or DCFC, have the unique ability to charge an EV in less than 20 minutes. This technology is imperative to successfully electrify the transportation sector because it reduces EV driver range anxiety and promotes equitable adoption of EVs for those that do not have access to charging at home or work.
However, an EV charging station requires a massive amount of power, similar to what’s required for a small factory or big box store. The California Public Utilities Commission estimates that California alone will have to spend $50 billion by 2035 in distribution grid upgrades to meet its ambitious electrification goals. Chargers ranging from 150 kW to 350 kW are now becoming the norm at public charging stations, and under the National Electric Vehicle Infrastructure Program, sites must provide a minimum of 600 kW of power output to charge four EVs simultaneously. As such, fast charging stations can incur very high energy costs, namely in the form of demand charges. These high energy costs threaten the economic viability of fast charging stations.
Demand charges are essential fees that enable a utility to recover the cost of maintaining, upgrading and building the electric grid in proportion to a customer’s grid impact. For electric customers that use high amounts of power, such as locations that host fast charging stations, demand charges are designed to ensure that each customer is paying their fair share to deliver power safely and reliably to all customers.
In the context of EV charging, demand charges can be unpredictable and complex. For fast charging stations, this can result in high, and often unforeseen, operating costs that challenge the business case of owning and operating such stations.
Given this dynamic, many utilities and policymakers have opted to reduce or completely eliminate demand charges for fast charging stations in hopes of spurring investment in this critical infrastructure. In the short term, such solutions may reduce operating costs for EV fast charging stations, and possibly even result in more stations being built. Unfortunately, this approach will only increase the strain that fast charging puts on the grid and fails to address a systemic issue holding back the transition to electrified transportation. The electric grid is not equipped to meet the projected demand for EV charging at the scale and pace needed to meet decarbonization goals.
Reducing or eliminating demand charges is also a matter of equity since the forgone revenue will have to be collected elsewhere so that a utility can still operate and maintain the grid. Waiving demand charges for fast chargers will shift costs to all ratepayers, including non-EV drivers. In Massachusetts, for example, demand charge relief is projected to result in forgone utility revenue of $84 to $131 million. This will be recouped from other ratepayers via increased electricity rates.
Just as importantly, eliminating demand charges will discourage the adoption of technologies available today that can help customers to reduce their grid impact and which provide customers the tools to avoid demand charges. Without this critical signal, customers will have less incentive to choose load management technologies and managed charging solutions, which will become more and more critical as the number of EVs on the roads increases over the coming years.
Today, load management technologies are successfully lowering the high power demands being placed on the grid while providing the ability to deploy EV charging in a timely and cost-effective manner. Pacific Gas and Electric of California reported that charging sites utilizing load management technologies reduced a charging station’s power needs by more than 50% resulting in savings of $30,000 to $200,000 per site, primarily in avoided grid infrastructure upgrade costs. Given that building and maintaining grid infrastructure is one of the largest contributors to electricity rate increases, these types of approaches will benefit all ratepayers through system-wide savings.
While several states have already implemented demand charge relief, thereby disincentivizing customers from considering and adopting load management technologies, other forward-thinking policymakers in New York, Colorado, Massachusetts and California have sought alternatives and a more balanced approach. These jurisdictions have decided to prioritize and encourage the use of load management technologies that can accelerate electrification while minimizing cost and impact on the grid. Others can follow their lead by considering:
- Requiring annual reviews of rates with demand charge alternatives to assess cost-effectiveness, efficiency of DCFC infrastructure buildout, and impact on electric rates for nonparticipants in order to fully understand the costs and benefits of these approaches.
- Limiting the duration of approved rates with demand charge alternatives to two-year periods and only until a permanent rate design solution is available in order to balance short-term support for a nascent industry with ratepayer interests.
- Providing rates with demand charge alternatives to only stations with a load factor of 5% or less in order to target support to sites with the lowest load factors and utilization.
- Implementing incentives for load management technologies equal to the relief provided by rates with demand charge alternatives to ensure that these solutions are not artificially uncompetitive to potential customers.
- Creating managed charging programs to ensure that customers are appropriately incentivized to manage their electricity consumption and the EV charging industry is incentivized to create innovative solutions that balance the needs of EV drivers with those of the electric grid.
By following these principles, utilities and policymakers will help to promote an affordable and sustainable transition to electrified transportation while balancing the needs and interests of all stakeholders.