ESL-IE-82-04-151
INTERRUPTIBLE ELECTRIC RATES:
WHERE WE ARE TODAY
Robert J. Frees
AIR PRODUCTS AND CHEMICALS, INC.
Allentown, Pennsylvania
service can produce an initial reduction of:at
least 50 percent of one year's normal growt~ in
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generation and transmission capacity.
INTRODUCTION
Interruptible electric rates are as far
from being a widespread method of load manage­
ment today as they were almost nine years ago at
the height of the Arab Oil Embargo. Utilities
and industrial consumers have been "cooperating"
to reduce overall cost since the early sixties
and even earlier in Europe.
Interruptible service is very similar to
stand-by tickets for an airline which are p!iCed
below the regular service fare but allow th air­
line to "bump" the passenger should the fli ht be
overbooked. Just as there has to be an eco~omic
advantage for an airline passenger to purchase such
a ticket, industrial customers are not interested
in interruptible power per se. They want reliable
power to operate their manufacturing proces$es. If
they can tolerate some interruptions in service,
they may be willing to do so, if they can s~ve
money. With the right interruptible discou~t and
the proper type of manufacturing process, e~ergy
intensive industries such as Air Products c!n
remain competitive in national and world ma kets
and thus continue to maintain prosperity an high
emp 1oyment.
I
Now is the time to reevaluate where we are
in our effort to find the optimum utility­
industry cooperative arrangement involving
interruptible power rates and then promote it as
a method of energy management. Within the past
few years, time-of-use rates, for both indus­
trial and residential users, have been touted as
the answer to shaving peaks and filling valleys
in a utility's load curve. Their effectiveness
in doing so, however, is still open to question.
By contrast, load management - where for eco­
nomic reasons a customer permits the utility to
control the power switch - is guaranteed to
accomplish this.
Energy Intensiveness
I
Air Products and Chemicals, Inc. is a ~ulti­
national corporation with annual sales in e~cess of
$1.6 billion dollars. We are a major suppller of
industrial gases worldwide, manufacturing sych
common gases as oxygen, nitrogen, argon, hy~rogen,
carbon dioxide, carbon monoxide, helium, et¢. in
both gaseous and cryogenic liquid form. Inladdi­
tion to our industrial gas business area, AIr
Products manufactures industrial chemicals ~hich
now account for more than one-third of our world­
wide sales. Nationwide, the production of
industrial gases, for both on-site and mere ant
sales, represented by 146 plants with 30 ma or
locations in the U.S., is expected to consume over
3.4 billion KWH of electricity in 1982.
Interruptible Rates
As part of the National Energy Act of 1978,
PURPA called for utilities to offer interrup­
tible rates in Section III(d)(5) as follows:
"Each electric util ity shall offer each
industrial and commercial consumer an
interruptible rate which reflects the cost
of providing service to the class of which
the consumer is a member."
i
One thing PURPA did not do is convince the
various parties - such as utilities, state
commissions, and the industrial consumer - on
the potential benefits to everyone, including
residential customers, of having a fair and
cost-based interruptible service rate.
In Texas, we operate over 17 different,
locations including three major manufacturi~g
facilities at LaPorte, Pasadena, and Lone Star.
One of these facilities alone has an electric
demand in excess of 60,000 KW. A new liquid
oxygen/nitrogen facility will become commertial
this June at Midlothien, Texas with a demand of
ove r 10,000 kw.
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All of these industrial gas facilities!are
classified as energy-intensive with over 50% of the
total cost of production attributable to the elec­
tric power which drives the plants' large
Obviously, the curtailment of electric
power is not for everyone. Most industrial
plants require a reliable source of power, and
interruptible power, as a by-product of firm
service, is marketable only from a reliable,
well designed power system. Good salesmanship
on the part of utility companies and a major
public education effort to sell interruptible
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Proceedings from the Fourth Industrial Energy Technology Conference, Houston, TX, April 4-7, 1982
ESL-IE-82-04-151
compressors. Electric power now accounts for over
ll¢ of each sales dollar of the Company even after
dilution by non-energy intensive businesses such as
the engineering construction and contract mainte­
nance business of our subsidiary Catalytic, Inc.
Air Products has found, since our first
interruptible service contract with West Penn Power
in 1960, that load management through cooperation
with the energy supplier and computer control of
plant operations, is the foremost method of
reducing one of the largest components of a
plant's operating expenses. The process
employed in manufacturing industrial gases
characterizes the operation of a typical
interruptible-type customer:
o
highly energy intensive
o
capital intensive
small labor force
o
ability to store product
We have discussed the benefit to the
consumer-saving money - but what about the
utility? What does the utility gain by having a
portion of its total system load capable of
being interrupted at any time or at least within
a few hours?
Other Benefits - Other benefits which a utility
may realize due to interruptible rates are so
difficult to measure and define, they cannot
necessarily be classified as a planning benefit
or operations benefit.
These benefits fall into two major cate­
gories: planning and operating. There are many
subcategories under each with some overlap as
well, but by dividing these benefits into two
areas, advantage to the utility becomes appa­
rent.
Peaking units, when frequently brought on­
stream and off, increase necessary maintenance
and reduce the unit's life. By making the need
for such units less frequent, interruptible rates
prolong their life and reduce overall maintenance
expense.
Planning Benefits - Electric load that is
supplied on an interruptible basis does not
require the installation of generating capacity,
thereby saving capacity "investments". The
reliability of the system is improved by adding
additional reserve capacity and allows more
efficient utilization of the existing electric
plant. The system load factor is improved since
the utility can limit its peak demand by the
magnitude of its interruptible load. By
improving system load factor, several additional
benefits accrue:
o
cost effective use of more efficient
equipment
o
sale of spinning/operating reserves
allow for maintenance on a timely
schedule
Interruptible loads also reduce a utility's
overall operating cost by reducing average fuel
cost, not only due to the reduction in use of
higher priced on-peak energy but by 10werin~ the
system losses at maximum load. Since the I R
losses of a transmission and distribution system
can be quite high (8-15% of total generating
kwh), reducing the system peak and improving load
factor can effect a substantial savings on fuel.
Benefits of Interruptible Rates
idle generation capacity is reduced
o
Operating Benefits - Since interruptions would
normally occur during peak load hours, and since
such hours are typically those when the higher
energy cost equipment, or high cost purchased
power, is used, reduced demand for energy during
such hours can reduce the average and total
operating cost of the utility. Another operating
benefit results from the ability of the utility
to be selling their spinning reserve which may
normally be sitting idle consuming fuel but
producing no output.
So if an industrial process can fit all or
some of these criteria, an opportunity exists to
save money through load management.
o
ability to plan future capacity on a
base-unit basis
Large base load generating units are often
hindered in their ability to respond quickly to
changes in system load. If a utility determines
that its peaks occur within a short period of
time, it may, for planning purposes, install more
peaking units rather than economical base units.
By having the flexibility of interrupting the
equivalent amount of load on short notice, the
uneconomical peaker can be avoided. (This bene­
fit accrues to operations as well.)
interruptible process
o
o
Since the late sixties, forecasting future
system demand has become an almost "crystal ball"
exercise with the impact of inflation, conserva­
tion, a see-saw economy, and price elasticity
causing utility demands to become stagnant in
some parts of the country and grow at rates of
7-10% in other areas like here in the Sun Belt.
In a Drazen-Brubaker study for the interrup­
tible customers of an East Coast utility, the use
of interruptible load to correct for errors in
long-term forecasting as well as abnormal weather
conditions was described. The utility is
presently forecasting a 13-16% reserve margin in
the 1988-1989 period. If their annual load
growth is only one percentage point higher than
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Proceedings from the Fourth Industrial Energy Technology Conference, Houston, TX, April 4-7, 1982
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ESL-IE-82-04-151
Wood Electric Co-operative in Ohio), Northe n
Indiana Public Service Company and Ohio Pow~r.
The control room operators in the industrial
plants have continuous data similar to that
available to the power company's dispatcher. In
order that their electricity be supplied from
only the reserve capacity of the utility - ~he
capacity which must be kept spinning in any event
to ensure system reliability - the customer of
Ohio Power change the operation of their e1 ctric
furnaces in equal one-third steps, as many as 90
times per year. In the other three cases, the
utility supplies data on its total system load
and the customers assume the responsibility for
managing their operation to keep their load as
low as possible at the time of the utility's
system peak.
anticipated, the reserve margin during the same
period drops to 6-14%, well below what is con­
sidered standard utility practice.
A delayed generating unit or prolonged
surrmer heat storm could have the same effect.
According to the study, a combination of a 10%
increase in the weather-sensitive load and a few
months' slippage in the start-up of a planned
generating unit could drop the utility's reserve
margin in 1990 to 2%. In these times of uncer­
tainty in plant construction schedules, NRC
licensing, ra~epayer revolts towards "over
building", and high capital costs, the chances
of a unit being delayed are becoming greater. A
util ity with an adequate interruptible load or a
rate schedule that would attract new interrup­
tible load stands a far better chance of meeting
customer needs when the forecasting crystal ball
becomes cloudy.
In most other locations, plant operators are
informed a short time in advance by the utility
of an impending interruption. A few repres nta­
tive advance notifications and criteria for
interruptions are shown below:
Interruptible Rate Design
For a utility to attract customers to take
less than firm service, a rate must be developed
that saves the customer money without unduly
disrupting his operation. Interruptions can be
more tolerable if they are kept to a maximum
length of time or a maximum number of occur­
rences. In the case of an air separation
facility such as those operated by Air Products,
the number of occurrences is more important than
the length, since each shutdown requires four
hours of non-productive start-up time and wasted
energy. Once the plant is "down", on-site
product storage could supply customer needs for
up to four days in some cases. The total hours
of interruptions per year though is important,
since it does reduce the loading factor of the
plant and may cause a shortfall of product in a
particular market area.
Alabama Power Co.
The main provisions of interruptible rates
which we have encountered in the U.S. are:
o
o
o
o
o
o
o
o
o
o
Advance
Notification
Util ity
15 min 24 hours
Reason
Reduce peaks
Baltimore G&E
2 hours
As required
Delmarva P&L
30 minutes
Avoid ne peak
Jersey Central
P&L
30 min ­
2 hours
R,d",
Public Service
E&G
2 hours
l"
Reduce p aks
Southern Ca 1if.
Edison
10-30 mi nutes
West Penn Power
10 minutes
Avoid peaker
Operatiorn
:
Frequency of Interruption
Duration of Interruption
Pattern of Interruption
Notification of Interruption
Criteria for Interruption
Duration of Interruptible Commitment
Priority of Interruptible Customers
Minimum or Maximum Load Requirements
Penalty for Failure to Interrupt
Level of Discount
Spinning,
reserve:
shortag~
The maximum hours of interruption req~ired
by a util ity is dependent on the util ity' s Isystem
and is usually expressed in terms of hours Iper
interruption, per day, per month, or per y~ar.
It is usually tied to the number of hours ~he
utility is above a certain predetermined percent
of peak demand. For example, in the Drazen­
Brubaker study mentioned earlier, data was:
acquired which showed the utility in questlon had
the following number of hours at or above a given
percentage of its peak demand.
In compiling data on existing and proposed
interruptible rates in the United States, we
have found a wide variation in each of the
provisions listed above. Our own plants, which
have interruptible rate schedules with ten U.S.
utilities, also show a wide variation.
Number of Hours at a Given
Percent of Peak Demand
Year
In some locations, real time data is used
to inform the interruptible customer when a
utility is approaching system peak. Good
examples of this exist with New Orleans Public
Service, Inc., Buckeye Power (through Hancock-
1980
1979
1978
100%
98%
95%
90%
85%
:80%
10
39
47
38
126
157
157
247
419
317
j481
1675
650
10
11
1
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838
Proceedings from the Fourth Industrial Energy Technology Conference, Houston, TX, April 4-7, 1982
ESL-IE-82-04-151
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From a table such as this, utility system
planning departments can determine how many
hours the utility needs to reduce their system
peak and develop the rate schedule accordingly.
The studies suggested two major ways of
calculating an interruptible rate - evaluating it
with respect to firm service or as a separate
class of service. By determining the actual
cost-of-service of firm power, then deducting the
actual cost savings resulting from interrupti­
bility, a conservative estimate of the cost
differential can be determined. It is conser­
vative since many of the intangible benefits
would not be included. If the interruptible
class is looked on as a separate group, diffi­
culties can occur since using conventional
costing methods could result in flawed results
depending on whether the class is actually
interrupted or not in a given year.
Level of Interruptible Discount
The amount of discount a utility can offer
an interruptible customer depends on the
approach taken to calculate the savings the
utility accrues. Unfortunately, no one method
has been universally accepted to calculate such
savings and in many cases the analysis is com­
plicated by a number of factors.
First, there are many different types of
interruptible rates available as shown above
with some based on individual contracts with
each interruptible customer. Secondly, many of
the savings accruing to a utility because they
have a reliable interruptible block of load are
difficult to measure, such as protection against
errors in future load forecasting. Finally,
there is quite a difference in the actual
savings a utility may realize and what they
could have realized. The key to interruptible
service is that it is available to be inter­
rupted, not that it is actually interrupted. So
how then can a monetary value be put on such a
service?
Ernst and Whinney used a number of different
costing methodologies and compared the results to
determine if the eXisting discount was accep­
table. The three methods used were:
o
o
t·
.~ .
Each of the methods has its pitfalls
depending on the utility in question. Different
generating fuel mixes can result in inequities
between various utilities due to the use of
peakers or high capital versus high energy
generating units. Ernst and Whinney proceeded to
use the three methods on the data provided by
Delmarva Power & Light for the test year ending
30 September 1982. The results shown below
indicate the flaws in one of the methods.
The conclusions reached in both studies
were quite similar indicating that perhaps a
general method of determining an interruptible
discount may be possible. In general, the
findings of both studies indicated that:
o
the pure peak off-set method
the system lambda method
the selective allocation method.
The peak off-set method calculates the annual
cost of a peaking unit and subtracts it from the
existing firm demand charges. The system lambda
method has no demand charge but rather sets the
interruptible customers' energy charge equal to
the system lambda on a time-of-day basis. The
last method - selective allocation - basically
performs a typical cost-of-service analysis but
excludes items not attributable to the interrup­
tible class.
In order to determine the bounds of
reasonableness of an interruptible rate, two
studies were recently conducted in Delaware ­
one undertaken by the utility and the other by
the interruptible customers of the utility.
Ernst and Whinney, an independent consulting
firm, was hired by the utility; while the
industrials, including Air Products, used the
firm of Drazen-Brubacker and Associates, Inc.
The purpose of the dual study was to determine
whether or not Delmarva Power and Light's
interruptible discount of $6.98/kw/mo or 64% of
the firm demand charge was indeed reasonable or
whether it should be raised or lowered. The
study was ordered by the Delaware Public Service
Commission as part of a rate order issued in
December, 1981.
o
Using various costing methods do give a
range of reasonableness that can be
used as a guide for setting the rate.
Method
Present Interruptible Rate
Interruptible electric rates are a
valuable tool to a utility in both
planning and operating.
Discount
From Fi rm
28%
0%
Firm Rate
Many of the benefits to a utility
cannot be precisely measured.
Peak off-set
28%
Selective Allocation
31%
System Lambda (All Year)
There is no one single way of deter-'
mining what the absolute discount
should be.
System Lambda (Only On-Peak)
1%
18%
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Proceedings from the Fourth Industrial Energy Technology Conference, Houston, TX, April 4-7, 1982
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ESL-IE-82-04-151
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reasons. Unfortunately, many utilities in ~any
states have yet to implement any form of in~er­
ruptib1e rate. A recent survey of the uti1 ffties
here in Texas shows that four of the ten ma·or
utilities in the state still have no filed r
interruptible service rates.
Since Delmarva Power & Light (DP&L) is
heavily dependent on oil-fired generation, the
system lambda method, even with no demand
charge, results in very little discount from the
existing firm rate. In the future, as DP&L's
fuel mix changes, this method will more closely
approximate the peaker method. Ernst and
Whinney concluded that the existing discount was
indeed reasonable.
I
In New England the situation was even i'orse,
with only three out of twenty-three uti1iti s
contacted offering a filed and approved int rrup­
tib1e electric rate. One utility, Central aine
Power, had a rate in effect for years but wfth­
drew it two years ago citing lack of custom r
interest.
Drazen-Brubaker & Associates, Inc. (DBA)
took a different approach in evaluating the
discount. DBA analyzed the cost-of- service
study submitted by DP&L in the last rate case as
well as another cost-of-service study submitted
by an outside consultant on behalf of the Dela­
ware Commission's staff. The utility's study
used zero for the coincident peak allocation
factor resulting in an extremely high rate of
return (71.92%) using the approved interruptible
rates. This excess return (1.09¢/kwh) repre­
sents the interruptible class' contribution to
facilities built for the firm classes. No
additional operating savings were included.
,
Whether the failure to generate interelt in
an interruptible rate is due to a poorly de igned
rate, lack of utility promotion, or custome 's
failure to analyze their operation to deter ine
its interruptibi1ity, is anyone's guess. Mst
likely it is a combination of all three. T e
potential benefits of such a rate in lowerirg
operating cost should be enough to motivatelany
industrial consumer to work with his power
supplier to develop a rate that provides th~
advantages to the utility cited above and i~
attractive enough to interest the industrials.
As power costs continue to climb, industrial
operating expenses will be more closely scr~ti­
nized for any areas of possible savings. Mst
plants have implemented the first stages of
energy conservation and are entering into t e
costlier phases of reducing power costs. T e
economic advantage of taking less than firm
electric service from a power supplier may ow be
at hand.
The Commission staff's study used an
average and excess methodology which shifted
rate base toward high load factor customers,
particularly the interruptible class. This
methodology resulted in an underco11ection of
$3.3 MM in revenue from the class. This method,
however, does not recognize any of the benefits
described earlier in the planning and operating
characteristics of a utility. The study did
concede, however, that an interruptible block of
load would shift demand from on-peak to off-peak
periods and thereby reduce fuel cost to the
utility. The fuel savings by reducing the need
for high priced peaking generation was cal­
culated at an average of 2.5¢/kwh times the
total number of hours of interruption. Using an
historical average of 109 hours per year, the
resultant savings was $226,000 or $2.70 per kw
of interruptible load.
Bibliography
Drazen-Brubaker & Associates, "Analysis of !
Controllable Rate Q Pursuant to Opinion a~d
Order of the Delaware Public Service Cornm ssion
in Docket 923, Phase II, February 1982.
DBA stresses that both studies fail to
recognize the operating and planning savings
which accrue to the utility due to its inter­
ruptible block of load. Factoring these in
results in the discount presently in effect. In
addition, DBA pointed out that improving the
discount could increase the amount of inter­
ruptible load above the present 83.9 MW or 6% of
its firm load. Since DP&L experiences numerous
one-hour jumps in demand of 160 MW or more, an
increase in the discount to attract more inter­
ruptible load is justifiable.
Ernst & Whinney, "Interruptible Power Study' ,
Submitted to the Delaware Public Service
Commission pursuant to the Opinion afld Or er in
Docket 923, Phase II, February 1982.
E. A. Perreault, "Strategies for Curtailing
Electric Power," Chemical Engineering, 84
No. 11, May 23, 1977.
Edward V. Sherry, "The Impact of Load Manag , ent
on the Industrial and Commercial Sectors,"' The
Cha11en e of Load Mana ement - A Conver e ce-Df
Diverse Interests, Federal Energy Adminis ra­
tlon, June 1975.
Conclusion
Interruptible electric service has been
shown to be beneficial to all classes of cus­
tomers and the utility for a large number of
E. V. Sherry, "Energy Conservation
~,
2, No.5, Summer 1977.
840
Proceedings from the Fourth Industrial Energy Technology Conference, Houston, TX, April 4-7, 1982