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Demand Charges Part 1: An Introduction

By: Joey Anderson

Peak demand relative to consumption

Peak demand relative to consumption

Over the past several months we’ve been having more discussions with utilities about residential demand charges. In a series of posts, we will delve into what demand charges are, share our outlook on how residential demand charges may evolve, and think about how we can leverage technology to help utilities and customers benefit from these new rate structures. In this post, we will look at what demand charges are and why they’re important.

To understand demand charges, we first need to understand what demand charges are put in place to address – peak demand. Peak demand on the grid occurs during hours when generation, transmission, and distribution resources are being used at maximum capacity. Peaks tend to occur at extremely hot or cold moments, when power reserves are called upon to sustain the excess demand that homes and businesses need for cooling or heating. These homes and business generally pay for two components of electricity: the amount of electricity consumed, measured in kWh, and the rate at which this electricity is consumed (referred to as “demand”), measured in kW.

Demand charges are meant to address this second component. Customers who consume energy at a higher rate require a larger pipe to deliver that electricity, raising costs to supply energy to them. Utilities put demand charges in place so that customers pay for their individual contribution to the cost of supplying electricity and maintaining the infrastructure needed to sustain demand during these peak moments. This includes building enough generation capacity to provide electricity at peak times, maintaining the transmission infrastructure that ships electricity from power plants and converts it into low voltage, distribution grade power, and finally, maintaining the distribution level infrastructure that brings power into our homes. Demand charges for residential customers are new, but are quickly becoming a popular way for utilities to recoup costs.

Until recently, volumetric rate structures more or less treated residential customers equally in terms of their demand. Discrepancies between customer consumption patterns (known as load profiles) were only treated at a high level, with different tiers to account for differences in home size, energy consumption, and the like. This method applies a general rule to homes rather than measuring the actual peak demand of each home. Historically, residential customers paid a variable charge, proportional to their monthly consumption of kWh and a fixed charge imprecisely related to their kW threshold.

But this model is rapidly evolving in favor of more detailed demand charges. What’s going on and what’s driving this change?

Most prominent is the proliferation of distributed energy resources. As customers put solar panels on their roofs, purchase efficient lighting, install smart thermostats, and take other steps to consume less from the grid, they use a smaller volume of the service utilities have historically charged for—electrons.  Utilities, however, still need to maintain the grid and meet peak demand reliably when many customers all turn on their AC and other appliances at the same time. Under current volume-based rates, with less total electron purchases, they aren’t getting as much income leading to the need for an updated rate structure.

Additionally, as advanced metering infrastructure penetrates the residential sector, it is becoming much cheaper to measure and prove differences in how each home uses energy. Advanced meters can pinpoint the 15 interval each month where demand at an individual premise is at its highest point, and from there assign a demand charge to cover the infrastructure needed to service that demand. Without smart meters, it would not be possible to accurately measure peak demand and therefore assign demand charges. This generally involves lowering volumetric rates and increasing demand charges.

The problem with residential demand charges is that many homeowners are often unaware that they exist and how to manage them to their benefit. An instantaneous, coincident use of loads in the house—an air conditioner, dryer, and stove, all running at once—can set the peak demand (and demand charge) for the home, regardless of how energy usage fluctuates thereafter. When this individual home’s peak demand (local peak) occurs at the same time as a peak on the overall grid (system peak), demand charges can be even more severe.

To help residential customers better manage demand charges and come out ahead on their energy bill, EcoFactor and several of our peers have developed technologies like smart thermostats to help residential customers intelligently manage their energy usage to avoid spikes in demand in general but especially during system peaks. Using data from advanced meters, HVAC systems, and weather feeds, we can predict when a customer will hit their peak, send notifications to that consumer to turn off appliances, or even automatically adjust those appliances on the end users behalf.

As we look deeper into these rate structures, however, we’re seeing that there is not one model for a residential demand charge. Across different jurisdictions, utility territories, and demographic areas, demand charges can be structured differently. Over the course of the next posts we’ll look at a few different examples of residential demand charges and flesh out the implications of these models.


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