Competing Perspectives on Demand Charges

Deck: 

Survey of consumer advocates identifies areas of agreement and disagreement

Survey of consumer advocates identifies areas of agreement and disagreement

Fortnightly Magazine - September 2016
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Consider industry developments such as growth in the adoption of distributed generation and the arrival of Wi-Fi thermostats, digital appliances and smart meters. Consider also the growing interest in promoting price-based demand response. Both have recently exposed deficiencies in the standard non-dynamic volumetric residential rate offerings of most electric utilities.

One deficiency in particular has persisted for decades. The under-representation of the cost of generating and delivering power during peak times of day has been exacerbated by these developments. Similarly, off-peak costs have been overstated.

As a result, residential rate reform has emerged as a pivotal issue. There is a challenge facing the industry. Flat and largely volumetric rates do not sufficiently reflect time-differentiation in underlying resource costs. Nor do they sufficiently reflect the peak demand-driven nature of infrastructure investments that the rates are intended to recover.

Figure 1 - Summary of Perspectives

This leads to under-recovery of costs from some customers who use the power grid heavily, or who otherwise rely on it as a form of backup power. Those costs are recovered from other customers who pay more than their fair share of the grid, raising concerns about fairness and equity.

A variation on the existing residential rate design that could address this issue is the introduction of demand charges. They would recover some portion of the utility's costs through a charge based on a measure of the customer's peak demand for electricity (kilowatts) rather than on the customer's total monthly consumption (kilowatt-hours). 1

There are potential benefits to this approach. The introduction of well-designed demand charges would help to address the fairness issues described above. They would reduce a cross-subsidy between customers with flat consumption profiles and those with peaky consumption profiles.

Demand charges would also provide customers with an opportunity to reduce their electricity bills. Customers could manage their electricity demand, either through behavioral changes or through the adoption of emerging technologies (such as smart thermostats, automated appliances, energy storage). If the rate is well designed, this should lead to a reduction in system costs for the utility as well.

It is worth recalling that demand charges have been a standard feature of commercial and industrial customers for decades. They provide regulatory precedent for including these rates in future residential offerings.

See the sidebar on the last page: Brief History of Demand Charges.

Many agree that the current residential rate design is unsustainable. But some industry stakeholders have expressed concerns about the introduction of demand charges as the

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