Capacity charges are the second biggest energy cost for most consumers, yet many don’t understand why they pay them or how to lower them. To begin with, it’s important to realize the power grid doesn’t run at maximum capacity every day. Power can’t be stored, so power companies only generate enough to meet demand hour-to-hour.
Demand fluctuates both throughout the day and throughout the year. It peaks during the summer and the winter, when people are cooling and heating their homes the most, and in the evening when the majority of people are home. Power companies respond to rising demand by activating more of their generating capacity (power plants, wind turbines, etc.) and pumping electricity into the grid.
If demand exceeds supply, the grid fails. Brownouts or rolling blackouts occur, which can damage electronics, disrupt businesses, and paralyze cities. To prevent this type of disaster, power companies have to build enough capacity to fully power their service area during peak demand. In actuality, power companies strive to build more, so they have a reserve on hand in case of emergency. In some instances, they purchase power from other power companies rather than build new plants themselves.
Not surprisingly, ensuring adequate power requires an extensive infrastructure, which is paid for by you, the consumer. That’s what capacity charges are for: constructing and maintaining the plants, substations, and transmission lines that power your home. In short, they’re the fees you pay to guarantee the lights stay on when demand peaks.
How are Capacity Charges Calculated?
Capacity charges are based on your peak load contribution during the previous year: the amount of electricity you consumed during peak hours over the past 12 months. The capacity year generally begins on June 1st, but peak hours vary between regions. In California, they’re 4 p.m. – 9 p.m., while in New Jersey they stretch from 9 a.m. – 9 p.m.
Thus, your capacity charge is calculated based not only on how much electricity you consume, but when you consume it. Lowering your capacity charge requires changing your long-term energy habits. This may mean adjusting your thermostat, lighting your home more efficiently, or cooking with your microwave instead of your stove. In fact there are dozens of ways to reduce your peak load contribution, but they have to be done regularly to have any effect on your power bill.
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