Price Discrimination and the Adoption of the Electricity Demand Charge

Abstract

Between 1905 and 1915, as state price regulation became widespread, electric utilities in the United States faced severe competition. The primary source of electricity for industry then was not utilities but self-generation by the user in an “isolated plant.” The demand-charge rate structure first became widespread during this period. The demand-charge rate structure has been interpreted as a misapplication of the peak-load pricing principle, a view which has made its popularity a puzzle. Instead it was adopted as a sophisticated mechanism which institutionalized profit-maximizing price discrimination given the competition from isolated plants.

Effects of demand charging and photovoltaics on the grid

“…Its original idea was to increase the competitiveness of utilities in the United States. This was necessary because the primary source of electricity for industry was self-generation and not the utilities [13]. The demand charge was probably a good prize discrimination option for utilities in the early days of the centralized production of electricity [13].…”

“…This was necessary because the primary source of electricity for industry was self-generation and not the utilities [13]. The demand charge was probably a good prize discrimination option for utilities in the early days of the centralized production of electricity [13]. The use of a demand charge enabled the utility to differentiate between retail customers and customers with an isolated own plant.…”

“…The use of a demand charge enabled the utility to differentiate between retail customers and customers with an isolated own plant. These customers were potential candidates for demand charging, if the customers operating costs exceeded the utilities marginal costs, but were below the normal market prizes the smaller customers were charged [13]. Today, the newly developed metering infrastructure enables demand charges for retail customers at affordable costs.…”

“…However, beside all this similarities, there are two major differences between the situation today and one hundred years ago. Firstly, we assume that individual peaks are more likely to occur simultaneously with system peaks than industrial peaks were in the past according to [13]. If this assumption holds, a reduction of individual peaks should, at least to a certain extent, lead to a reduction of the system peak.…”

Visualizing building energy demand for building peak energy analysis

“…The U.S. electric utility industry widely adopted a demandcharge rate structure starting around 1905 to 1915 to charge consumers based on the maximum power consumption within the billing period, in addition to charging for the total amount of electricity consumed during that billing period [1]. For large commercial and industrial users, the electricity demand charge is usually separated from the total consumption charge in their billings, and is charged at a significantly higher rate.…”