The demand charge comes about because of how power plants actually work. They can't throttle the plant precisely to meet demand, it just doesn't respond that way. So instead, the generate an excess amount of power and then throttle a load dump, usually a cooling tower or pond. They can quickly regulate that load since it is just a big resistor.
The more variability in the load, the more excess energy they have to generate and waste, and thus the more cost. Also, the more spikes in load, the heavier the transmission lines need to be to avoid excessive voltage drop.
For industrial users, demand charges are a fact of life from the start due to their high needs. For the highest users, like aluminum smelting, they have their own power plant just for that.
For homeowners, the theory is always that there are so many users the load levels out. But that's changing in modern times.
Case in point, there is a plant in Wales England called Dinorwig, also called Electric Mountain.
en.wikipedia.org
It is a pumped hydro station with 1.8 GW of turbines. It exists because of football (soccer) and because of electric kettles. The football provides the synchronizing event, the game is over, and that's time to put the kettle on. The little kettles in the UK are up to 2.8 KW (!!). They boil the water FAST! The average house in the UK doesn't use that much electricity, so the kettle is like a major spike in usage over the average.
At Dinorwig, they watch the game, say Manchester against Aresenal which might draw lots of viewers. When the game is near the end, they will pressurize the turbines with air and spin them up using the generators as a motor. This is the quick start mode. When the load spikes, they open the penstock and the plant can go from 0 to 1.8 GW in 16 seconds to meet the demand spike.
During the day, they pump the water back up to the reservoir during times of low use. So the plant doesn't generate new power, it just stores it like a huge battery.
If you had a community with lots of grid attached solar, it kind of acts like the kettles. With clouds, the plant is pumping out a lot of power since everybody's panels are weak. The cloud passes by and suddenly everybody has excess power they are pumping into the grid. The plant can't reduce production that fast, so it all goes to waste in a cooling tower. So the dream of generating clean energy hasn't saved any dirty power plant energy at all in this scenario. This is why grid tied residential solar doesn't scale without storage.
Of course, it isn't black and white like that. The cloud doesn't block and uncover the entire service area all at once, but residential grid tied solar worsens the peak to average ratio the power plant has to work with. The plant can use forecasts and models to adjust to some degree, but it is getting worse and not better.
EV rapid chargers are also making it worse. My car can charge at well over 250 KW and that load comes and goes when you hit a roadside fast charger for 15 minutes.
This is why you see utility scale battery systems being installed. Huge plants of trailer sized batteries. What these do is allow the utility to reduce the power plant output to close to average and let the battery produce or absorb the difference, much like your EV either drives or regens. This is exactly like residential battery system but on a much larger scale. With those systems, you can start to save power by wasting less of it in a load dump.
Another area I expect to see is demand control for EV home charging. EV charging can be used to eat the excess power *if* the power plant can control the demand precisely and quickly. This would allow the plant to load dump far less saving energy. Home EV charging is usually an overnight thing, so the plants can let it happen during the low use times.
Electricity is complicated and political as evidenced by the differing rules all over the country. At a certain point, going off grid is the ultimate treatment for being enslaved to the utility, but does require you manage you energy and loads carefully. The tech to do this is improving every single day and I expect the number of off grid homes will increase significantly over time.
Mike C.