Are Residential Demand Charges The Next Big Thing in Electricity Rate Design?

This briefing by RMI explores the potential of residential demand charges as a tool for electricity rate design. It argues that as distributed energy resources (DERs) like rooftop solar and electric vehicles increase load variability among residential customers, traditional energy-only charges become inequitable. Demand charges, which bill based on the maximum power used in a cycle, can more accurately reflect grid infrastructure costs, promote customer equity, and provide price signals that encourage load shifting and the adoption of demand-management technologies.

• Residential electricity loads are no longer uniform due to the adoption of technologies such as LED lights, smart thermostats, plug-in electric vehicles, rooftop solar, battery energy storage, and demand-flexible water heaters. This shift makes the traditional practice of lumping energy and demand costs into a single $/kWh price inaccurate, as it is now inexpensive to meter differences in the magnitude of demand and time of use.
• A demand charge is based on the maximum energy a customer uses at any single instance during a billing cycle, representing the cost of maintaining the infrastructure (the "size of the pipe") required to deliver that power. Implementing these charges achieves two primary goals: promoting customer equity by billing based on the actual demand placed on the grid, and providing a price signal that encourages customers to smooth their load through efficiency, battery storage, or EV charge management.
• Demand charges can resolve conflicts regarding the compensation of distributed generation (DG) customers by providing a clearer value proposition than controversial fixed charges or value of solar tariffs. For example, Salt River Project (SRP) introduced a seasonal, inclining block demand charge for future net-metered PV customers to incentivize west-facing PV systems and the adoption of load controllers or batteries. Westar Energy proposed a residential DG option in March 2015 combining a lower fixed customer charge with a demand charge.
• Demand charges can benefit residential customers without solar, with at least 14 utilities implementing such options. Black Hills Power, operating in South Dakota and Wyoming, offers a demand charge option for all residential customers and promotes a Demand Controller Program. This program uses customer-owned devices to cycle appliances like heating, cooling, and hot water heaters in 15-minute cycles to minimize monthly bills.

APA

Lehrman, M. (2015). Are Residential Demand Charges The Next Big Thing in Electricity Rate Design? RMI. https://rmi.org/resources/residential-demand-charges-next-big-thing-electricity-rate-design/

Chicago

Lehrman, Matt. Are Residential Demand Charges The Next Big Thing in Electricity Rate Design? RMI, 2015. https://rmi.org/resources/residential-demand-charges-next-big-thing-electricity-rate-design/.

Wikipedia

{{cite report |last1=Lehrman |first1=Matt |title=Are Residential Demand Charges The Next Big Thing in Electricity Rate Design? |publisher=RMI |date=21 May 2015 |url=https://rmi.org/resources/residential-demand-charges-next-big-thing-electricity-rate-design/ |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{lehrman2015are, author = {Lehrman, Matt}, title = {{Are Residential Demand Charges The Next Big Thing in Electricity Rate Design?}}, institution = {RMI}, year = {2015}, month = may, url = {https://rmi.org/resources/residential-demand-charges-next-big-thing-electricity-rate-design/}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }