The Demand Charge Dilemma at EV Charging Stations

With the transition to electric vehicles, utilities are becoming the new “gasoline wholesalers” as they provide critical fuel for transportation. Understanding their complex energy rate structures could make or break your EV charging business. Demand charges, in particular, can be toxic to your bottom line.

There’s an ongoing industry-wide debate about how utilities should handle demand charges. Fully disbanding demand charges would cost utilities something like $2.9 billion per year in opportunity cost, not to mention their initial $90 billion or so capex outlay to support getting power to the charging stations in the first place.

COMMENTARY

As traditional fuel stations transition to EV charging, having adequate knowledge of retail charging economics—and specifically how new cost and revenue levers impact a site’s profits and losses—will be vital for their growth and success.

What Are Demand Charges?

Commercial and industrial (C&I) facilities typically have much higher peak power needs than residential homes so utilities must build out the local grid to reliably meet their maximum power demand. Utilities recover the cost of this additional infrastructure through demand charges on company electric bills.

Demand charges are a function of power in kilowatts (how much energy you need in a given period) and accompanied on a bill by energy costs (the total kilowatt-hours of your energy use). They are typically based on your highest level of grid use during an interval (typically 15 minutes in the U.S.) or billing period (usually a month) according to a fixed dollar-per-kilowatt rate.

How Can Demand Charges Impact EV Charging Businesses’ Margins?

While demand charges are somewhat logical for factories that use large, sustained loads throughout the day, things get a bit hairy when considering EV sites. An EV site might require more power than a factory but only uses it for few minutes per day. Yet, the site is penalized at the same rate as the factory.

In a real-world example, assume a typical national highway corridor EV charging site with four, 150-kW DCFCs for a potential peak load of 600 kW. There are plenty of reasons the site may never hit its peak load, but for simplicity’s sake, let’s say it does. If it’s in the Northeast, it could have a demand charge of about $15/kW. Multiply that by a 600-kW peak and you’re at a $9,000 charge per month!

Going a step further, we can break down that cost per charging session. Assume 300 sessions per month, or about 10 a day, which equates to $30 per session. To put that in perspective, the average revenue per session today is about $16, meaning that the site would be operating at a net loss of $14 per session. You’d need to almost double the EV volume to break even on just the demand charge, before considering other costs of good sold.

How Are Utilities Responding?

Utilities and public utility commissions recognize the EV demand charge issue and have funded programs that either waive demand charges or have special volumetric rate structures to significantly reduce them (EVgo published a concise guide here) to minimize the barrier of entry as much as possible for site hosts to invest in infrastructure today to support EV adoption tomorrow. However, many of these programs are made to reintroduce demand charges as EV volume increases.

We calculated National Grid’s EV rate, for example, which is based on a site’s total energy use divided by the power over a given period, known as load factor. This would cut demand charges by 100% at up to 26 charging sessions per day, 50% up to 36 sessions per day, and 0% by 37 sessions per day. This rate favors mid-size sites with average usage and penalizes small sites and large sites with high usage. While it’s a great program for the next few years, it still could negatively impact smaller independent sites or even NEVI-style corridor sites within high traffic areas, and certainly future profit margins.

If we put on a utility stakeholder hat to estimate the potential business impact or lost opportunity cost, we’d end up with a hole of approximately $2.9 billion. If we assume NREL’s projected 180,000 direct current fast chargers with an average output of 150 kW, that gives us a peak national load of 27 million kW. The average demand charge in the U.S. is $9/kW, so that equates to about $243 million in demand charge revenue per month, and $2.9 billion per year. If we consider that 168 investor-owned utilities cover most of the states with high EV penetration, that’s an annual demand charge impact of $20 million per utility before the $90 billion CapEx investment of about $500 million per utility.

What’s the Solution?

If utility rates stay the same, then the average revenue per charging session would need to more than double to cover additional infrastructure costs. If the cost per charging session decreases, then the utility or ratepayer will need to absorb the initial $90 billion plus $2.9 billion more each year.

The reality is that we’ll need a mix of custom rates, continued government funding, and private sector tax. To throw something out there, perhaps we add a small tax to all a regular internal combustion engine (ICE) cars sold in the U.S. to help cover the $2.9 billion in demand charges. If we sell about 16 million new ICE cars each year, each sale would be responsible for a $170 investment to cover the charge. Once EVs are the majority, still quite some time away, we take the equivalent $170 tax based on greenhouse gas emissions from those companies not getting energy from renewables.

It may sound a bit liberal, but one way or another, climate change is everyone’s problem, and a clear solution will be needed to support rolling out this vital infrastructure.

—Cole Rosson is Director of Business Development for Sparkion, an engineering-led provider of cost-effective, reliable energy management solutions for the behind-the-meter industry with a focus on electric vehicle charging infrastructure (EVSE). Rosson has spent more than a decade in the auto and e-mobility industries through roles at companies like Jaguar Land Rover, Ferrari, TikTok, and EVBox, where he gained expertise in understanding the current and future market dynamics in the EV and EVSE spaces.