Competing Perspectives on Demand Charges
Published in Public Utilities Fortnightly, September 2016. Copyright PUR Inc. (www.fortnightly.com). Used by permission of the publisher.
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.
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.
