The following paper was co-authored by Douglas Jester, Principal with 5 Lakes Energy, and will be distributed at the upcoming Summer 2016 meeting of the National Association of Regulatory Utility Commissioners (NARUC). What follows is the text of the introduction — to download/view the full paper, please click here.
Charge Without a Cause?
Assessing Electric Utility Demand Charges on Small Consumers
Electricity Rate Design Review Paper No. 1
July 18, 2016
John T. Colgan
Introduction & Overview
There has been significant recent attention to the possibility of including demand charges in the electricity rates charged to residents and small businesses. Electric utilities have historically served these ‘small customers’ under a two-part rate structure comprised of a fixed monthly customer charge that recovers the cost of connecting to the grid and an energy charge (or charges) that recover all other costs. Much of this attention to the issue of demand charges for small customers has been initiated by electric utilities reacting to actual or potential reductions in sales, revenue and cost recovery.
Demand charges are widely familiar to large, commercial and industrial customers, where they are used to base some portion of these customers’ bills on their maximum rate of consumption. While a customer charge imposes the same monthly cost for every customer in a rate class, and an energy charge usually imposes the same cost per unit of energy used over a long period of time (e.g. the entire year, a month, or all weekday summer afternoons), most demand charges impose a cost based on usage in a very short period of time, such as 15 minutes or one hour per month. The timing of the specific single maximum demand event in a month that will result in demand charges is generally not known in advance.
The goal of this document is to unpack the key elements of demand charges and explore their effect on fairness, efficiency, customer acceptability and the certainty of utility cost recovery. As will be evident, most applications of demand charges for small customers perform poorly in all categories. Following are five key takeaways:
- Residents and small businesses are very diverse in their use of electricity across the day, month and year – most small consumers’ individual peak usage does not actually occur during peak system usage overall. This means that traditional demand charges tend to overcharge the individual small consumer.
- Apartment residents are particularly disadvantaged by demand charges because a particular apartment resident’s peak usage isn’t actually served by the utility. Utilities only serve the combined diverse demand of multiple apartments in a building or complex rather than the individual apartment unit. Demand charges are complex, difficult for small consumers to understand, and not likely to be widely accepted by the small customer groups.
- Very little of utility capacity costs are associated with the demands of individual small consumers. Nearly all capacity is sized to the combined and diverse demand of the entire system, the costs of which are not captured by traditional demand charges. If consumers actually were able to respond to a demand charge by levelizing their electricity usage across broader peak periods, then utilities would incur revenue shortages without any corresponding reduction in system costs.
- Demand charges do not offer actionable price signals to small consumers without investment in demand control technologies or very challenging household routine changes. This results in effectively adding another mandatory fixed fee to residential and small consumer electric bills.
To read the full paper, please click here.
Posted by Douglas Jester, Principal
Monday, July 18, 2016