In response to changes in the power sector, some utilities are proposing high fixed charges or demand charges for residential customers. However, this type of pricing can prove disadvantageous, as it does not differentiate between customer-specific and shared grid costs, it can burden small users, and discourages energy efficiency. Residential demand charges are a relic from an era when all generating resources cost about the same to build—a concept misaligned with today’s mix of resources, which includes renewable energy, demand response, and central and distributed batteries.

In a presentation to the Advanced Energy Economy (AEE), Jim Lazar examines these two types of charges and provides examples of equitable, “smart” rate design. Drawing on pricing principles from the RAP publication “Smart Rate Design for a Smart Future,” he notes that customers should be allowed to connect to the grid for no more than the cost of connecting to the grid and should pay for the grid in proportion to how much and when they use the grid. Replacing demand charges with time-of-use rates, for example, fairly distributes systems costs to consumers with even widely-varying usage profiles.