Utility Facility Charges: A Primer

A question came in today from a consultant pursuing energy efficiency opportunities in IT - thought it a good policy to answer here in the blog so that others can access the information. Edited question:

"Assuming a data center is over built with regard to its electricity capacity, does the customer have to secure a fixed amount of power from the utility upfront and pay up for it even if it isn't used?  Or does the utility company charge you based upon a variable rate on the energy you have used?"

If you ask a utility to install a given amount of electric capacity, to what extent are you "on the hook" for it if you don't end up using it all? The answer is "to a large degree"!

Utilities make capital investments in the form of distribution (and sometimes transmission) capacity based on customer load projections. If those loads don't materialize, there are tariffs in place that allow the utility to bill for their costs of ownership of the facilities. This arrangement is typical for any commercial load of appreciable size, and takes effect if energy use is below a preset level.

So, an office building, or data center, that has facilities to support 1 MW of load will be charged under the applicable rate schedule (a customer charge, demand charge, and usage rate), unless the load isn't enough to cover the capital investment for the facilities. Then the utility will send a monthly bill to recoup the costs of the infrastructure.

Customers can avoid the ongoing cost of ownership charges two ways: asking for the capacity that will adequately serve their actual loads, or by paying for the equipment outright. For large loads (multi-MW), customers sometimes opt to build their own distribution equipment (a dedicated, customer-owned substation) to get lower utility rates. In that case, they would avoid paying the cost of ownership charges.

By the way, utilities and their customers learned this all the hard way during the dot.com boom of the late 1990's. So many colocation data centers were built on spec, and the demand didn't materialize (until recently!), so utilities sent cost of ownership bills.

Unfortunately, many of the companies filed for bankruptcy, so utilities were stuck with capacity investments with no revenue to cover them. Ouch! Now I find utilities are far more circumspect about installing facilities. If you ask for 10 MW, they'll counter that you should install five and wait for the other five, and they'll wrap up the facilities charge agreements really tightly.