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

The briefing examines the transition from flat residential electricity rates to demand charges, which bill customers based on their peak power usage rather than total energy consumption. It argues that as technologies like rooftop solar and electric vehicles create diverse consumption patterns, demand charges can better align customer costs with the actual strain they place on the grid. The author highlights that such rates incentivize load shifting and the adoption of DERs, citing examples from utilities like Salt River Project and Black Hills Power.

• Residential electricity loads are becoming increasingly diverse 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, making the traditional practice of lumping energy and demand costs into a single $/kWh price obsolete.
• Demand charges, which are based on the maximum energy used at any one instance during a billing cycle, serve 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 automation.
• Implementing demand charges can help resolve disputes regarding the compensation of distributed generation (DG) customers and may encourage the deployment of specific technologies to align generation with system peaks. For example, Salt River Project (SRP) introduced a seasonal, inclining block demand charge to incentivize the installation of west-facing PV systems.
• Several utilities have already implemented or proposed residential demand charges. Westar Energy proposed a choice for DG customers involving a lower fixed charge plus a demand charge in March 2015, and Black Hills Power offers a demand charge option for all residential customers in South Dakota and Wyoming, supported by a Demand Controller Program to help customers manage their loads.

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} }