Retail Supply Versus Capacitors at a Ratcheted Demand Tariff
A 320,000 ft² distribution center in a deregulated state buys full-requirements service from the incumbent utility. Its 12-month peak is 1,450 kW, set last August; the current-month peak is 1,200 kW. The tariff has an 80% demand ratchet based on the highest summer or winter peak, a $15.50/kW demand charge, and energy at $0.082/kWh for the first 400,000 kWh and $0.061/kWh thereafter. Monthly consumption is 520,000 kWh. Power factor is 0.87; a penalty of $0.00035/kWh applies for each 0.01 below 0.95. A competitive retail supplier offers a fixed all-in energy price of $0.071/kWh with no demand charge, but the utility still bills delivery at $6.80/kW based on actual monthly peak, with no ratchet. The facility operates 24/6, and July peaks are driven by refrigeration. The CFO wants a one-year decision and asks whether to add 600 kVAR of capacitors or sign the retail contract.
1. Calculate the current monthly bill at the 1,200 kW peak, including ratcheted demand and the power-factor penalty, and compare it with the same month under the retail offer. Show each component.
Read the worked answer
Current tariff:
- Ratchet demand = 0.80 × 1,450 = 1,160 kW. Billed demand = max(1,200, 1,160) = 1,200 kW.
- Demand charge = 1,200 × $15.50 = $18,600.
- Energy = 400,000 × $0.082 + 120,000 × $0.061 = $32,800 + $7,320 = $40,120.
- PF penalty: 0.95 − 0.87 = 0.08, or 8 increments. 8 × $0.00035 = $0.0028/kWh. 520,000 × $0.0028 = $1,456.
- Total = $18,600 + $40,120 + $1,456 = $60,176.
Retail offer, assuming the utility PF penalty still applies:
- Energy = 520,000 × $0.071 = $36,920.
- Delivery = 1,200 × $6.80 = $8,160.
- PF penalty = $1,456.
- Total = $46,536.
Indicated savings = $60,176 − $46,536 = $13,640/month, or about $163,700/year. The comparison is not just an energy-price comparison: the retail offer removes most of the demand charge and the ratchet, so verify delivery riders and capacity obligations before treating the savings as firm.
2. Evaluate the 600 kVAR capacitor option against the retail contract. Include the effect on power factor, demand charge, and payback if capacitors cost $55,000 installed.
Read the worked answer
Existing apparent power = 1,200 / 0.87 = 1,379 kVA. Existing reactive power = √(1,379² − 1,200²) ≈ 680 kVAR. Adding 600 kVAR leaves about 80 kVAR, so new kVA ≈ √(1,200² + 80²) = 1,203 kVA and PF ≈ 1,200 / 1,203 = 0.998.
The demand charge is billed in $/kW, not $/kVA, so the capacitor bank does not reduce the demand charge. It eliminates the PF penalty: $1,456/month × 12 = $17,472/year. Simple payback = $55,000 / $17,472 = 3.1 years. That is a reasonable PF project, but it does not address the dominant demand-charge and energy-price gap. If the retail contract is signed, the capacitor project may still be worthwhile if the utility PF penalty remains, but the retail offer is the larger economic lever. The CFO should not treat capacitors as a substitute for tariff review.
3. What risks or checks should the CFO require before signing the retail contract? Provide a decision recommendation.
Read the worked answer
Checks: confirm that the $0.071/kWh is truly all-in and includes transmission, ancillaries, line losses, capacity, and renewable attributes; confirm whether the utility PF penalty and any other riders remain; review supplier credit and collateral; check take-or-pay or minimum-volume terms; verify the load profile and interval data used for the quote; and test the economics if the facility peak rises above 1,450 kW or if consumption falls.
Recommendation: sign a one-year retail contract only after confirming delivery riders and PF treatment, because the indicated savings are large relative to the current bill and the ratchet risk is transferred away from the utility delivery charge. Keep the capacitor project as a separate PF-penalty measure, not as the primary decision. If the retail offer contains hidden demand charges or a capacity pass-through, re-run the comparison; do not sign on the headline energy price alone.