A Hurdle to Overcome

Demand charges are stumbling blocks in the push for the fast chargers EV drivers want.

A Hurdle to Overcome

September 2021   minute read

By: Keith Reid

Convenience retailers are anxious to offer electric vehicle charging services that are both affordable for drivers and profitable for c-stores. Widespread adoption of EVs, where practical, hinges on the infrastructure buildout needed to solve the “range anxiety” problem, plus a competitive marketplace that doesn’t favor one sector over another, all combined with the Biden Administration’s ambitious goals to electrify the U.S. vehicle fleet.

It is a tall order to be sure.

“Any changes to the transportation energy mix must make it work for American consumers—which means those changes must work for our industry,” said AJ Siccardi, president, Metroplex Energy Inc., a RaceTrac subsidiary which purchases bulk and rack fuel to supply the Atlanta, Georgia-based retailer’s two operating divisions. “Fuel retailers already have the real estate. We offer the services and amenities that consumers have come to expect, alongside the refueling network such as foodservice facilities, restrooms, security and the like. Until consumers see alternatives like electricity at the outlets where they currently refuel, they will not adopt those alternatives in large numbers.”

About 80% of U.S. convenience stores (121,538 out of 150,274) sell motor fuels. Traditional motor fuels retailers looking to make the move to EV charging currently face a significant hurdle—electric utility demand charges.

Demand charges are additional fees that investor-owned utilities charge to nonresidential or commercial customers for maintaining a constant supply of electricity. Average energy usage by these businesses might not be exceptional, but on occasion their energy demand spikes well above the average, and the electricity capacity must be able to support those spikes. Utilities pass along those costs to the high peak users. Demand charges are typically based on the highest peak usage in any 15-minute period and can vary by state.

In 15 minutes, a fast charger adds the same power as the entire store operation running all the fuel pumps, all the refrigeration and freezer units.

So how does this come into play with EV charging at retail? Convenience stores must offer the fastest charging possible, with as many charging points as practical, so that the EV customer experience is comparable to the gasoline refueling experience. However, the faster the charger, the more energy that must be drawn.

Level 1 and Level 2 chargers can be used in residential applications, and Level 2 also can be used in longer-term, incremental-charge retail applications such as shopping mall parking lots. The fastest Level 2 charger provides up to 30 miles of driving range per hour, with a full charge in eight hours or less (depending on the vehicle battery size). The cost to fully charge a battery can vary significantly based on variables such as the capabilities of the charger, the capabilities of the vehicle and the utility rate assessed. In general, the electricity used in Level 1 and Level 2 charging is relatively inexpensive, but charge times are slow.

Typical EV drivers with conventional travel pattens use home charging about 80% of the time, according to the U.S. Department of Energy. Much broader EV penetration is expected to include drivers without access to at-home chargers, such as multiunit residents and urban dwellers, and increased needs to charge on the go.

The convenience industry requires direct current fast chargers (Level 3) comparable to the quick tank fill-up experience for the customer, as well as the high-volume customer throughput business model. Fast-charger customers include:

  • Urban drivers who lack home-charging options
  • Ride-hailing and ride-sharing drivers
  • Interstate travelers
  • Drivers who mismanage their home charging

Direct current fast chargers (DCFS) offer charging between 50 kW and 150 kW, with a full charge in about 30 minutes. While that is far faster than a Level 2 charger, it still takes three times as long as the typical gasoline fueling experience.

For customers on the interstate looking to charge up quickly and get back on the road, chargers in the 250 kW to 350kW range are needed, along with vehicles that can accept that charge rate (currently limited to high-end vehicles like the Porsche Taycan). In optimal conditions, Level 3 chargers can charge to a 192-mile range in 12 minutes at 350 kW. DCFCs typically charge to 80% of battery capacity since the last 20% can add significant time to the process.

A driver should not be penalized for needing to refuel at certain times of the day, and fuel retailers should not be penalized for providing the electricity for that refueling.

DCFCs, even the older generation, create issues with demand charges. In the current early adoption period, a DCFS charger might only be used occasionally. The energy consumed will be relatively light during a month, but that is calculated separately from the peak demand charges.

“Just one of those fast chargers, give or take a little, adds about the power requirement during one of those 15-minute periods as the entire store operation running all the fuel pumps, all the refrigeration and freezer units—the whole thing,” said Doug Kantor, NACS general counsel. “So, it’s a big difference in terms of demand.”

And what happens if on occasion multiple vehicles DCFS charge at the same time, especially when it comes to the latest DCFS? The peak demand could easily be over one megawatt.

“Fuel retailers getting hit with demand charges cannot compete with a utility that has substantially lower costs for energy and power,” said Siccardi. “What’s more, demand charges are compounded, so a fuel retailer will be saddled with higher demand charges for every additional charger available to their customers.”

Challenges for Convenience Retailers

“With the liquid motor fuels market, you have a commodity that you can go out and purchase from a wholesaler,” said Paige Anderson, NACS director, government relations. “You have lots of different suppliers and options. You have real-time competitive prices, and you have that wholesale cost and know the costs required to get the fuel in the tank. Then you’re able to sell it directly to the consumer every time they want to fill up their car. Unfortunately, the electricity market is quite different.”

The major challenge with demand charges is setting a price that recoups cost, generates profit and avoids potential “price gouging” accusations if a retailer makes the wrong calculations on covering the costs.

A 2019 Great Plains Institute study found that if EV penetration reaches 10 charging customers per day, 50 kW stations will break even at nearly all electric utility rates. For 150 kW (total), a DCFC station will break even for about half of the electric utility rates studied. A capacity increase beyond 150 kW (total) “makes it nearly impossible for a station operator to break even except in cases where the electric utility does NOT have a demand charge,” according to the study.

RMI, an independent, nonpartisan, nonprofit organization working to accelerate the clean energy transition, looked at the costs for EVgo, a retail charging network provider. It found that demand charges can be responsible for “over 90% of a charging station’s electricity costs” and result in customers paying a gasoline equivalent of $20 per gallon in a worst-case scenario.

Retailers can reduce demand charges by adding additional battery capacity to even out peaks. But that comes with added capital costs.

“There’s simply not a good justification for demand charges on the operators of electric vehicle charging stations,” said Kantor. “Anyone who actually wants this market to develop so that there can be more chargers and more electric vehicles out on the roads should agree that demand charges just should not apply to the dispensing of electricity. That would go a long way toward telling the private sector there might be a basis for real investment here.”

The Utility Perspective

The utility sector broadly disagrees with the sentiment that demand charges, a traditional feature of commercial rate structures, should disappear.

“Demand charges serve a necessary role in ensuring cost recovery for the utility,” said Garrett Fitzgerald, principal, electrification, at Smart Electric Power Alliance, which helps electric utilities implement and deploy clean energy and distributed resources. “However, there are a number of examples where utilities and regulators have recognized the challenge they create for DCFC and have implemented temporary alternatives.”

He noted that California and New York are ahead in these efforts, largely because “It’s where the EVs are,” and that the states that are behind will catch up quickly. The relief, seen as temporary during market development, can be a waiver. Or utilities might offer demand-charge credits or charge holidays where the first five years might have no demand charges. But, from year six to 10, demand charges gradually ramp back up. Demand charges should be much less of an issue as the market matures.

“If your charger is used just once a month the demand charge component is going to make up a large fraction of your bill,” said Fitzgerald. “But if that charger is used a hundred times that month your demand charge didn’t actually go up. You’re having something like the experience at a gas station where there’s folks just coming in and out.”

Charging Networks

The greatest impact from demand charges would be felt by the smaller retailer looking to be an independent “electricity marketer” just as they might be an independent liquid fuel marketer today. Larger regional or national charging networks have leverage with utilities to negotiate more favorable arrangements and economies of scale relative to DCFS costs. Existing charge networks can absorb the relatively few DCFS customers across a broad network.

Many of these networks will work with retailers to facilitate charging at their locations, often absorbing the capital and energy-rate risks. However, the retailer gives up control to the charging partner, and the model might or might not facilitate such things as revenue sharing or integrating charging into the retailer’s customer management and loyalty systems.

Where networks are concerned, the number of offerings keeps expanding.

Unconventional players are getting on board. For example, General Motors Co. and Ford Motor Co. are not only making big moves to electrify their vehicle line up but also have entered partnerships with charging providers. Tesla led the way, and a number of other automakers have followed. GM just announced a partnership with four companies that electrify parking lots and truck depots for a fleet-focused approach. EVgo is one of GM’s preferred providers for its Ultium Charge 360 fleet service.

The major energy companies are looking to become electricity providers to support EVs and more, and not just at their traditional retail sites. They are making numerous acquisitions and investments to serve customers in any charging scenario.

Utilities are also testing the waters, which has raised some concerns. How competitive can you be with a utility that also controls the wholesale costs?   

“Fuel retailers will be limited in their ability to lower the prices to the consumer unless you have competition in the fuel supply chain,” said Siccardi. “Utilities sell power to EV charging retailers at their own internal transfer price. Demand charges, which set our rates exorbitantly high, are another impediment to make the EV business case for retailers. A driver should not be penalized for needing to refuel at certain times of the day, and fuel retailers should not be penalized for providing the electricity for that refueling.”

Fuel retailers getting hit with demand charges cannot compete with a utility that has substantially lower costs for energy and power.

Fitzgerald noted that “on the very extreme” there are some cases where utilities do own and operate the chargers themselves, and that’s where there’s some discussion on what the role of the utility should be. So far, utilities have been careful not to make too many waves.

“What we’ve seen is utilities will essentially look at the average cost of EV charging in that area, and then set their price to not undercut that so that they are competitive,” said Fitzgerald. “Now that might not be how it is in the future, because utilities are required and encouraged to set their rates based on the cost of service. And they’re regulated, and they’re serving kind of societal purpose.”

An argument can be made that branded retailers deal with this to some extent when the oil company operates company stores, though there is usually care taken to make sure the retailer has a competitive environment. However, efforts are made to minimize competitive overlap, and the retailer can switch brands in a competitive market or make the switch to unbranded fuel.

“There are utilities that see the potential of the electric vehicle market and the growing market as an opportunity to try to translate their monopoly position in selling electricity to residential homes and buildings and businesses and translate that monopoly into the electric vehicle charging market,” said Kantor. “And if they’re successful doing that, that would be tragic for the country. Obviously, it’s problematic for our industry, but our industry operates in one of the most price competitive and price transparent commodities markets in the world. The electric utilities operate in one of the least transparent and least price-competitive markets in the world, because it’s mostly monopolized.”

“Our decarbonization efforts should incentivize private sector investments in the desired behavior—offering alternatives that reduce carbon output,” said Siccardi of Metroplex Energy. “To be effective, any alternative—including electricity—should be offered in an open, competitive market that gives American consumers the fullest economic benefits of robust price competition.”

NACS Connects C-Stores With EV Partners

To promote the availability of electric vehicle chargers at convenience stores, in 2020 NACS launched the Electric Vehicle Infrastructure Program. Through this program, NACS has established relationships with organizations interested in supporting the installation of electric vehicle service equipment at convenience stores. These organizations range from those seeking to install and operate their own equipment at NACS member locations to those seeking to finance the installation or provide technical assistance to facilitate the installation of such equipment or future proofing stores.

To learn more about this program, contact Fuels Institute Vice President Jeff Hove at [email protected] or (515) 250-2966. You can also visit www.fuelsinstitute.org/councils.

at the NACS Show

EV experts and experimenters will be at the NACS Show educating attendees in three key sessions:

  • EV 101: What Is EV/EV Charging and Why It’s Important
  • EV 201: How Do I Do EV?
  • EV 301: The Economics of EV Charging

Register today at www.nacsshow.com.

To learn more about this program, contact Fuels Institute Vice President Jeff Hove at [email protected] or (515) 250-2966. You can also visit www.fuelsinstitute.org/councils.

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