Essays on maximum demand charges in electricity

This thesis analyzes a topic in welfare-optimal pricing and investment for public utilities. The pricing structures analyzed employ maximum demand charges. Maximum demand charges are almost universally used in electricity pricing. Traditionally economists have considered maximum demand charges as generally inefficient. This thesis shows that there are reasons for reconsidering maximum demand charges. In Essay 1, I present a stochastic model of intertemporal consumption decisions by a consumer facing an ex post maximum demand charge. The basic methodological tool employed is stochastic optimal control theory. This essay analyzes the properties of the optimal consumption decision, including the magnitude and behavior of maximum demand in each period. I also provide the comparison of an ex post maximum demand charge with an ex ante maximum demand charge with uncertain demand. In Essay 2, I analyze an ex ante maximum demand charge under uncertainty. By including the cost of employing a penalty technology in the case of system overload, I generalize existing theory on welfare-optimal pricing and investment rules under demand charge. Essay 3 is devoted to the design of welfare-optimal differentiated maximum demand charges based on diverse consumption characteristics among heterogeneous consumers. I show that fully differentiated maximum demand charges have the form of nonlinear tariffs. We also provide a rationale for the Electricite de France (EdF) pricing practice. This essay concludes with some policy options for the design of innovative electricity pricing using demand charges