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Time to make a change to electricity tariffs?

Doug Houseman's picture
Visionary and innovator in the utility industry and grid modernization, Burns & McDonnell

I have a broad background in utilities and energy. I worked for Capgemini in the Energy Practice for more than 15 years. During that time I rose to the position of CTO of the 12,000 person...

  • Member since 2017
  • 255 items added with 91,613 views
  • May 19, 2022

For almost 100 years we have paid for infrastructure capacity by using a volumetric tariff, based on KWH as an alternative for a demand tariff.

It started because our instruments could not accurately gather KW information and hold it until retrieved. This changed with digital meters.

Demand based tariffs are far more equitable than volumetric tariffs are for the infrastructure portion of the tariff. Bi-directional demand tariffs will cause people to think about when they use power and whether to install storage.

It will actually flatten the peak and increase the number of hours the infrastructure is closer to full, by shifting load.

Expect infrastructure to last longer and NWAs to last longer too as the move is made to electrification.

Downside? Bills end up more volatile, with each high demand period rising bills by more than a couple of extra KWH would.

What say you all?

Rafael Herzberg's picture
Rafael Herzberg on May 19, 2022

Doug this theme you brought is super important! I have been trying to stimulate the electric power sector in this very same direction.

Basically because investments are denominated per capacity and as the power matrix is becoming renewable (in Brazil it is already more than 85%) the kW capacity is "the" cost driver.

Now with digital inexpensive meters the power bills should be focused on kW capacity. Every 15 min (for example) the recorded demand will be stored and by the end of the month the maximum recorded demand should be the one charged.

In this new concept I came up with a "demand exchange", a virtual platform sponsored by the electric utility company, where energy users would trade their demand differences in a zero sum game. 

This would stimulate end users reduce their demand (by doing so they would reduce their monthly power bills) and the local utility will be able to meet more kW used by clients (its load factor would improve). It is a win win situation.

If you would like to discuss this possibility/opportunity, make sure to contact me!

Rafael Herzberg's picture
Rafael Herzberg on May 19, 2022

Doug, this video shows the idea I came up with originally for end users (industrial, commercial and institutional) that already pay for contracted demand. The next step could be the residential sector which is only charged by kWh - but...should be evolved to include kW demand as well.

Julian Silk's picture
Julian Silk on May 19, 2022

I am undecided about this idea.  Would any of the people who comment on this discuss heavy but sporadic users such as hospitals or factories that do not operate 24-7 and how such ideas would affect their charges?  Wouldn't it just spur people to leave the grid altogether?

Rafael Herzberg's picture
Rafael Herzberg on May 19, 2022


The concept is associated with the way contracted/recorded demand is charged. Everywhere around the globe  the billed demand depends on a "ratchet" or a fixed demand.

The challenge for every other consumer (industrial, commercial or institutional) is: energy consumption and recorded demand changes with a list of conditions: technology incorporated (loads) which are always changing, intensity of activities in a specific given location, energy management systems that are incorporated (or not), etc.

In my experience with hospitals, industrial plants, corporate buildings, retail industry among others one aspect is always there: changes. 

The ongoing contracted demand format is very stiff (ratchet or fixed). A "demand exchange" as indicated above is a tool to help end users trade their idle demand differences (so that others willing to increase it may capture this opportunity) to reduce this cost BUT without hurting the local utility. Quite the opposite: end users will pay less and the utility postpone CAPEX related investments because its load factor will increase (the same grid infrastructure will be able to deliver more energy with the same overall contracted demand).

I hope this clarifies but feel free to get in touch to further discuss this matter!


Michael Keller's picture
Michael Keller on May 23, 2022

Not so sure demand based tariffs are equitable in the sense you are dealing with monopolies. Absent competition, there is no particular driver to deploy the most cost effective resources, particularly when utility companies kowtow to the politicians and the green energy mafia in order to earn essentially risk free profits.

California represents a particularly egregious example of where the lack of fiduciary responsibility on the part of utilities and public utility commissions leads to stunning electric bills that are crushing the average energy user. Rates, which are heavily time demand based, are easily three times what I pay in Kansas when simply calculated (net monthly dollars divided by net monthly energy use)

Seems to me the more traditional rate structure tends to force utilities to deploy cost effective resources, while the demand side structure is more prone to abuse by various special interests, including the utilities themselves.
A more traditional approach that is based more on averages, as opposed to instantaneous consumption, dampens out price volatility and tends to force utilities to cost effectively manage their resource deployments. 

Claims that the demand side approach is market based are not really accurate as the underlying market is essentially politically driven in a number of regions, e.g. California. Demand side rates are just re-regulation skewed to favor some parties over others, with the consumer inevitably  on the short end of the stick.
Utilities and utility commissions need to return to reasonably priced and reasonably clean energy as their guiding fiduciary principles.

Julian Silk's picture
Julian Silk on May 23, 2022

I sympathize with what Michael Keller is writing.  You can say that the rates should be demand-based.  But some poor slob, who is trying to keep his house cool, at 5 P.M. in the afternoon, get high charges having nothing to do with his behavior, which didn't change, and everything to do with the behavior of other people, which did.  You can imagine industries trying to finish product before a deadline, and traffic accidents or mass shootings which send people to hospitals, and drive up demand.  Where is the incentive for the electricity suppliers to increase supply to cope with this and keep rates low, so as not to punish this poor guy?

Rafael Herzberg's picture
Rafael Herzberg on May 23, 2022

Hi Michael,

Let's compare two right next door neighbors that consume exactly the same amount of energy - in kWh/month. Accordingly to the ongoing rate system, they pay the same power bill to the local utility company!

But... one has got 2 instant 5 kW water heaters and the other a 3 kW water tank heater. One house demands a lot higher kW than the other. And of course for the local utility company serving the client with the water tank heater requires a lower capital expenditure (capex) related to the electric grid infrastructure than the other with instant heaters.

And yet both pay the same bill. In my opinion it is high time to evolve the billing system. Basically because right now it is "all the others" who pay for the extra capex incurred by the local utility to meet the load of the home with instant heaters.

Michael Keller's picture
Michael Keller on May 25, 2022

Your logic strikes me as deeply flawed. The cost of energy has also been based on the how much is used; the more used, the higher the bill. Using essentially instantaneous demand coupled with artificially politically manufactured instantaneous rates removes the incentive for the producers to reign in costs. That is precisely what is occurring in California. 
The debacle in Texas several years ago demonstrates the logical end result of your proposal. Rates went up several thousand percent with financial firms making obscene amounts of money. 
The tariff structure you propose is designed for commodity traders, not consumers.

Doug Houseman's picture
Thank Doug for the Post!
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