Residential demand charges are popping up with increasing frequency in utility rate design proposals. They’ve even become the topic of an annual summit for utility executives and regulators. But, for ratepayers, demand charges offer few if any offsetting benefits and, worse, they don’t solve the problem they’re supposed to address.
That’s the conclusion of five utility rate design experts in a new report, “Charge Without a Cause: Assessing Electric Utility Demand Charges on Small Consumers”.
Residential consumers’ electric bills usually consist of a fee based on the amount of electricity we use (volumetric charge) plus a fixed fee that compensates the utility for connecting us to the grid. Now some utilities are lobbying for a new fee that ostensibly would compensate them for the added capacity they must maintain in order to meet occasions of peak usage – those times when overall energy use is the highest on the system.
While such fees, called demand charges, have long applied to large commercial customers, they have not been applied to residential users for very good reasons.
As the authors of the paper point out, demand charges, which are typically based on the heaviest 15 minutes of electricity consumption you experience in any given month, are both unfair and ineffective.
- They do little or nothing to reduce peak period loads. That’s because individual household peaks rarely coincide with overall peak periods that demand charges are supposed to mitigate.
- Consumers have no way of knowing when their peaks will take place. Nor do they know how much money peaks will cost. Consequently, they can’t respond rationally.
- Demand charges are especially hard on low-income, low-consumption households. That’s because these households, which actually do the socially desirable thing by using less electricity, also experience the largest variation in consumption. So, their demand charge fees are proportionately higher than those of high-income, high-consumption households whose consumption is more consistent.
- Those living in apartments that aren’t individually metered also suffer. These highly energy-efficient consumers have no way of knowing their levels of consumption or when they should try to reduce it.
But, perhaps the greatest injustice is that very little of utilities’ excess capacity costs are associated with the peak demands of small residential customers. Other rate design options, such as time of use rates or critical peak pricing programs, offer more promising avenues to help residential customers control their bill costs and the impact their energy use has on system peaks.