Demand-Side Management

DSM and Electric Utilities

Electric utilities were among the first to use DSM techniques to address capacity issues. Electric systems are expensive both to build and maintain. For much of the time, they operate below capacity, but to ensure reliability they are sized for those brief periods in the day and season when the network load is at its highest (peak). Depending on the geographic area, peak times may occur in summer or winter. Influencing the peak demand has proven an effective way for operators to manage the rate of network expansion and contain construction and operations costs while keeping electricity prices at affordable levels. Through DSM, utilities could avoid building what would be excess capacity for all but a few hours a day.

In their simplest forms, DSM programs are conservation campaigns exhorting consumers to switch off unnecessary lights and appliances, or to lower their thermostats. During the energy crisis of the 1970s when fuel prices were high, such programs proved effective in reining in consumer demand, but when oil prices began to fall, so did consumer resolve to conserve.

[Page 126]Incentive-based DSMs featuring tiered pricing were first introduced in the 1980s. Under these schemes (modified versions of which are still in use), residential and industrial consumers are charged a relatively low rate for the first tier of kilowatt hours they use. If they exceed this base usage, they pay an incrementally higher rate for the next tier and each successive tier. The increment may also increase—for instance, the difference between the first and second tiers may be an additional 1 cent per kWh, but the difference between the second and third tiers may be 3 cents per kWh. The tier rate may also be higher during one time of day as opposed to another, with rates typically being the highest during weekday business hours when demand tends to peak.

Some providers offer incentives for consumers to relinquish control of their thermostats to the utility during peak hours. Others offer incentives for consumers to install alternative energy systems. In some cases, utilities will reward consumers using alternative energy sources that can feed power to the grid by offering them discounted rates when they are using energy from the grid.

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