Utility Pricing Structures Encourage Consumers to Reduce Consumption

An increasing number of utility companies are moving towards Critical Peak Pricing (CPP), a pricing structure that designates periods of high electricity use during which electricity prices drastically increase. During these peak periods, the utilities must draw from extra power sources that are typically expensive to operate and harmful to the environment. Customers enrolled in CPP programs are notified in advance of peak pricing events and encouraged to reduce their energy consumption. Charging more for energy during peak usage times provides utilities a way to regulate customer demand. To make this policy more palatable, utilities discount pricing outside of CPP periods.

As it’s more difficult for certain business types to decrease energy usage during peak times, utilities provide an option called capacity reservation so as not to penalize these organizations. A capacity reservation pricing structure allows customers to reserve a specified number of kWs to be exempt from peak pricing that are instead charged at a standard rate. Capacity used beyond the designated reservation is charged at the higher CPP rate.

For individual customers, there’s no real rule-of-thumb regarding how to deal with capacity reservation since each utility uses a unique CPP and capacity reservation structure and every customer’s energy usage is different. In California alone, there are three different such pricing structures (see table below).

While CPP and capacity reservation pricing encourage customers to consider their energy usage, it’s difficult for energy consumers to optimize their plan while still fulfilling their needs. Regardless of how consumers proceed, it’s best practice for them to reduce energy usage during peak periods and use capacity reservations based on their risk tolerance.