The Evolving Role of Demand Charges in Retail Electricity Rates

Retail electricity demand charges refer to a type of retail rate that is based on a metric of kilowatt (kW) demand rather than kilowatt-hour (kWh) energy usage. Demand charges are widely used in the commercial and industrial (C&I) electricity sectors to recover significant portions of utility revenue and are also used in residential rates in a modest but growing number of locations. This paper explores the historical context of and motivations for demand charges, describes their implementation and impacts in today's context, and uses a variety of opinions collected from relevant parties through semi-structured interviews to inform how demand charges align with four widely accepted rate design principles. This project is funded by the Department of Energy's Office of Electricity, which is interested in conducting research to understand the current state of affairs related to demand charges and how the future U.S. electricity grid will help to define retail rates.