Effects of alternative pricing structures on electricity consumption and payments in the commercial and industrial sector

Abstract

We investigate the distributional and welfare impacts when commercial and industrial (C&I) electricity end users face a dynamic pricing structure as opposed to a constant volumetric price with demand charge on individual users’ peak usage. While demand charge does not necessarily reduce the system-wide peak, it often constitutes a large share of C&I users’ payments. Hourly electricity consumption data for C&I users on O‘ahu, Hawai‘i, reveal that the fixed cost recovery associated with removing demand charge has both significant distributional impacts and considerable efficiency gains. Moreover, the rate reform can be regressive or progressive depending on how the fixed charge is allocated across users.