Public Power Magazine

Mitigating the Sustained Erosion of Demand

From the March-April 2011 issue (Vol. 69, No. 2) of Public Power

Originally published March-April 2011

By Jeff Meyers, Josh Caywood, and Darrell Stolhand
March-April 2011
Many communities own and operate their public power systems. In most cases these systems have the dual responsibility of supplying low-cost, reliable electricity to customers while providing revenue to the community’s general fund. This dual role creates a potential dilemma, since in most cases revenues are dependent on sales of kilowatt-hours. Simultaneously, there is a strong national thrust, driven by a number of issues, to encourage energy efficiency and conservation, as well as the rapidly increasing availability of significantly more energy efficient appliances that reduce electricity consumption and ratepayer monthly bills. Data clearly show that demand destruction is real and that a sustained erosion of rate base is in progress and will accelerate as newer technologies are integrated and major appliances, especially heating, ventilation, and air conditioning (HVAC) systems, are replaced.

The Ponca City Development Authority in Oklahoma set out to explore these issues by understanding the disruptive forces and opportunities acting upon utilities, the underlying incentives and disincentives created by existing programs and rate structures, and the potential options to address these impacts. Many surprising findings—as well as mitigating options—were identified that will require significant commitment, involvement, and action by a city and its utility system for success.
Due to the existing recession that began in late 2007, electricity consumption has fallen around 7 percent nationally with significant variation based on local economic conditions. Although prior to the recession the average electricity consumption was projected to grow at a national average of 1 to 2 percent per year, permanent loss due to demand destruction and the impact on future consumption growth is now uncertain. In addition to the effects of the recession there is also sustained erosion of demand due to energy efficiency and conservation measures, the effects of which are potentially substantial. Examples of demand destruction due to such measures are installation of Energy Star appliances and replacement of incandescent light bulbs with compact florescent and light-emitting diode lighting, combined, which will result in power reductions of several percentage points. However, the astonishing conclusion of this work was the realization and quantification of the impact of HVAC system replacements on power consumption.

The objective of this study was to understand the revenue implications to Ponca City Energy due to changes in electrical consumption for 3 residential cases:
  • Existing residential gas-fired and conventional HVAC system (Base Case)
  • High-efficiency replacement HVAC with gas-fired furnace and water heating (High-Efficiency Case)
  • Ground source heat pump (GSHP) with electric water (desuperheater) heating (GSHP Case)
The experiences gained, however, have developed a significant knowledge base that exceeded expectations and revealed potential opportunities for mitigation.

Data show that replacing existing equipment with high-efficiency AC units reduces electrical consumption. The key question is how new units perform relative to other technologies, such as ground source heat pumps (GSHP). As with conventional HVAC systems, GSHP systems use electricity to operate pumps and blowers for the circulation of fluids and conditioned air to both heat and cool a building. The GHSP advantage over a conventional HVAC system is that approximately 50 percent of the energy used to heat and cool is gathered from the earth and not from an AC compressor or a gas-fired heater. Since the earth continues to provide energy for heating and a “sink” for cooling, GSHP is truly a source of renewable energy. How the two technologies compare, not only in operating efficiency, but also in overall annual municipal electrical consumption is a very important issue, especially in communities that use revenues from electrical sales to support other city services. To properly quantify the differential demand, computer modeling was performed on multiple homes located in North Central Oklahoma.

The process of modeling and simulating a building’s energy consumption was split into six steps:
  • Select a publicly available model that accurately simulates heat gain/loss with local weather conditions,
  • Define and input the building characteristics,
  • Calibrate the base electrical and natural gas usage,
  • Define and input the existing HVAC equipment operating specifications,
  • Calibrate total energy consumption, and
  • Simulate consumption with alternative equipment.

Simulation results confirmed GSHP systems provide significant total energy (electric plus natural gas) savings to the end-user, while increasing electrical power consumption. This occurs because the GSHP system with integrated water heating backs out gas consumption; supplying approximately 50 percent of the energy needs from the earth itself; and using electricity to accomplish all space conditioning and hot water heating. Since GSHP systems are extremely efficient when compared to conventional or high-efficiency traditional HVAC units, the total energy savings were substantial. The table on this page compares the simulation results, which are shown as a percentage of consumption with modeled homes using existing equipment.

Comparison of Energy Consumption Using the Average of Three Homes

Equipment Used
Total Energy Consumption (BTU Basis)
Gas Consumption
Electrical Consumption
Existing Equipment (Base Case)
 High Efficiency HVAC
 GSHP 50%

The city of Ponca City is a member of the Oklahoma Municipal Power Authority (OMPA), where the relationship is governed by a long-term contractual agreement with OMPA as the “wholesaler” and Ponca City Energy as the “retailer.” The cost of wholesale power delivered to Ponca City Energy is essentially based on 2 components: a capacity charge which is the highest one-hour peak usage in kilowatts for a calendar month and an energy charge which is based on the total number of kilowatt-hours delivered in a calendar month. The capacity charge is composed of individual charges for embedded (OMPA-owned) generation, market purchases of power, and transmission. The generation portion of the capacity charge is based on the highest one-hour peak usage taken by Ponca City Energy in kilowatts for a calendar year. On average the overall charges by OMPA are approximately 50 percent capacity and 50 percent energy.

When comparing the installation of GSHP versus conventional high-efficiency equipment, what ultimately mattered most in this study is the redistribution of power consumption and its effect on the city and utility revenue stream. As described earlier, the use of GSHP reduces summer peak demand; moves electricity consumption to the winter, while creating new electricity requirements; replaces the energy from natural gas with geothermal energy; and improves a utility provider’s load factor. In addition to the redistribution, GSHP also reduces peak consumption, and hence the capacity charge by an estimated rate of 0.5 kilowatts per ton of capacity. For Ponca City Energy the value of peak reduction in reduced billings for 2009 was equal to about $80 per kilowatt of reduction per year or $40 per ton of GSHP per year.


To understand the value of power consumption redistribution due to GSHP, a detailed analysis of utility rates was conducted to understand utility revenue, especially incremental net revenue. Incremental revenue is the income derived from the last kilowatt-hour sold or the first one conserved, or moved in the case of GSHP, since adding or removing the last kilowatt-hour does not influence the capacity charge. Between the months of October to April Ponca City Energy also offers a residential volume discount for usage greater than 600 kilowatt-hour per month, so that the residential rate is $0.084 per kilowatt-hour except the winter discounted volume which has a charge of $0.056 per kilowatt-hour.

To establish revenue and net income a detailed analysis was conducted for both wholesale purchases and retail sales for the period of 2007 to present. As a result of the rate analysis, several conclusions were drawn. First, net income to Ponca City Energy was determined to be $0.056 per kilowatt-hour during the months of May through September versus $0.029 per kilowatt-hour during the months of October through April due to the winter discount. GSHP moves consumption from the higher net revenue months to the lower, since the average winter meter already has a winter monthly usage of near 600 kilowatt-hours. Consequently, under the current rate schedule winter consumption for GSHP will nearly all be subject to the discounted rate. A solution to the reduction in net income is to eliminate the winter discount, or allow a ratepayer to make a one-time election for a GSHP installation rebate, but forego the winter discount. Since the rebate would be larger, those installing GSHP would drop the winter discount. Such a solution is equally beneficial to both parties with the consumer eliminating natural gas usage with significant savings, and for Ponca City Energy in increased electricity sales and offsetting revenue.

Incentives for GSHPs
Currently there are 3 incentives available, and one proposed, to Ponca City Energy ratepayers for the installation of GSHP, which are summarized in the table below. The rebates are also expressed as a percentage of the estimated installation cost of $6000 per ton of GSHP.

Incentive Dollars per ton ($) Percent of $6,000 per ton
30 Percent Federal Tax Credit
OMPA Oklahoma Comfort
Proposed $300
Total $4,200

The 30 percent Federal tax credit has no cap; is available through 2016; and, if the full credit can not be used in the current year, the remainder can be taken in subsequent tax years. The Ponca City Energy/OMPA WISE (“Why I Save Electricity”) rebate will provide $800 per ton of GSHP through an application process and is funded $400 each from the city and OMPA. The OMPA Oklahoma Comfort program, supported by American Recovery and Reinvestment Act funds through the state energy office and available through April 2012, will provide rebates at $1,000 per ton for systems less than 5.5 tons.

The final proposed $300 per ton is based on the understanding that without sufficient incentive, homeowners will upgrade to conventional, high-efficiency HVAC equipment with the accompanying demand destruction and loss of city revenue. Based on modeling results and eliminating the winter discount if the rebate is taken, the payback for the proposed rebate is around 3.5 years per ton. An analysis of net income to Ponca City Energy due to the redistribution of kilowatt-hours sold was performed and the results are shown below:


In spite of rebates and the tax credit, the very large upfront cost of installing a GSHP system is a major deterrent for most homeowners. To overcome this barrier the equivalent of a construction loan could be established with a local lending institution. Beside the monthly payments, large one-time payments could be made as rebates and the next year’s federal tax refunds are received. A utility and city could also develop strategies to help facilitate getting such lending programs established with their local banking industry.

The findings of Ponca City’s study offer a number of city and utility options:

  • Aggressively embrace GSHPs for residential, commercial, and industrial application, carefully evaluating and establishing rebates that provide proper incentives. Match the incentives with advertising, community training, and contractor seminars.
  • Investigate installation of GSHPs for city-owned and -operated facilities to reduce the power costs that have no billable customer. Evaluate all city facilities and build a prioritized list organized so that the greatest savings are generated for the least investment first. With appropriate publicity such a program will serve to provide a powerful example to create community awareness for GSHP by the city setting the example and taking the lead.
  • Create a residential energy audit program the costs for which are split between the homeowner and utility, allowing significant interaction and education about the benefits of and programs available for GSHPs.
  • When industrial or commercial customers install GSHP, make sure that the investment is well advertised to help create maximum public awareness.
  • If it does not already exist, create a renewable energy election program, e.g. Wind Energy Election; increase the rate by $0.001 per kilowatt-hour; and put the money into an “opportunity fund” to be used to purchase and install GSHPs for city facilities.
  • Carefully evaluate winter volume rate discounts and determine what objectives are being met, since such discounts provide a not-so-subtle disincentive for a utility to want to encourage installation of GSHPs. For preservation of revenues from the sale of electricity, such discounts should be eliminated.
  • An alternative to eliminating a winter volume discount would be to give the ratepayer the option to elect a GSHP installation rebate or keep the existing winter volume discount.
  • Develop and implement a plug-in electric vehicle program that allows charging during non-peak usage hours, e.g. 10:00 pm – 7:00 am.
  • Identify and implement cost reduction and revenue generation opportunities within the Utility.
  • As a standalone incentive plan, offer rebates or separate metering rates for electric hot water heaters.
  • Evaluate having the city provide partial loan guarantees to help people get financing.
  • Work with local lending institutions to set up financing similar to construction loans so that the principal can be paid down over time as rebates and tax refunds are received, after which permanent, long-term loan would be finalized.

GSHP offers increased future electrical sales while reducing ratepayer costs, a truly win-win situation. A city and its utility must take an active role to encourage installation of GSHP to offset the sustained erosion of demand created by installation of replacement high-efficiency conventional equipment.


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May-April 2011
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