Recently, Ryan Hledik and Ahmad Faruqui of The Brattle Group published Competing Perspectives on Demand Charges: Survey of Consumer Advocates Identifies Areas of Agreement and Disagreement (originally published in Public Utilities Fortnightly).
Traditionally, residential electricity rates have been flat, meaning that the price is the same regardless of the time of day or season. As the article explains, this rate structure “do[es] not sufficiently reflect time-differentiation in underlying resource costs . . . [nor does it] sufficiently reflect the peak demand-driven nature of infrastructure investments.” The problems with this traditional approach to residential electricity rates have garnered increasing attention with the rise of distributed generation and so-called smart appliances, as well as the growing interested in demand response.
Demand charges, which are one rate methodology related to grid modernization, are based on a customer’s peak demand, rather than on his or her total monthly consumption. Hledik and Faruqui conducted interviews with nine consumer advocates at national and state-level organizations about residential demand changes and attended a dozen industry events that addressed this topic. The authors found that opinions from consumer advocates ranged from “direct opposition to guarded support for residential demand charges.” The article also provides a summary of common concerns about demand charges and common responses to these concerns. For example, interviewees expressed concern that demand charges may result in increased bill volatility due to isolated high-electricity demand occurrences. However, the common response to this is that customer peak demand often varies less than monthly usage and that there are ways to minimize demand charge volatility through rate design.
The article concludes by listing several activities that will help stakeholders (such as utilities, consumer advocacy groups, environmental groups, policy makers, and regulators) address these and other concerns and come to consensus on the issue of demand charges. These activities focus on further quantifying the benefits of demand charges and their impacts on consumers’ bills as well as tailoring demand charges based on specific local concerns. While this article is centered on the concerns and opinions of the consumer advocacy community, it notes that focusing on other stakeholders will be valuable for future research.