Leveraging Demand-side Solutions to Meet Peak Demand

As electricity bills rise, the concept of “peak demand” is becoming more important to understand. Decision-makers can control these bills only with an understanding of what drives peak demand and new solutions to manage it. Managing these peak periods more effectively offers one of the largest opportunities to manage energy bills. 

Peak demand is also rising due to load growth, with 224 GW of growth in summer peak demand nationally expected from 2025-2035. This growth will drive electric rates higher if it materializes. However, demand-side resources can help moderate this growth and protect ratepayers. 

What is peak demand? 

The electric grid is a complex engineering challenge because at every moment, electricity demand needs to match electricity supply in order to prevent blackouts. There are some critical periods of time when electricity demand is highest – this is called “peak demand.” These are periods of time – which tend to occur on hot summer days or cold winter days – when the greatest amount of electricity is being drawn from the grid.  

Peak demand hours often occur in the afternoon on the hottest days of the year, as people come home from school and work and turn the air conditioning on. Peak demand can also occur during winter months, too. Consider what happens when a snowstorm hits, or when a polar vortex stretches away from the North Pole for days at a time. Naturally, households and businesses turn up the heat, and run it more often, increasing the amount of electricity being used. 

Peak demand is linked to higher bills in a few keyways. 

How higher peak demand drives high power generation costs 

One of the ways that peak energy demand increases customers’ utility bills is because, in simplified terms, the higher the demand for electricity, the higher the price. Customers pay more for power that is generated during peaks. 

During periods of highest electricity demand, utilities often rely on gas-powered peaking power plants, which operate infrequently but are expensive to build and run. The costs of building and operating these peaker power plants are absorbed by customers in every state. 

In states that are part of ISO/RTOs, these supply-demand dynamics drive up the wholesale electricity prices that customers absorb in their electricity bills. For example, ISO-New England’s 2025 summer statistics showed that when the peak load was between 2,000 and 14,999 MW, the average price of wholesale electricity was $50 per megawatt per hour, but when the peak load was greater than 24,000 MW, the average price was $458 per megawatt per hour. More recently, on July 1, 2026, the PJM region’s spot wholesale prices climbed to $600 per megawatt per hour, after being $40 per megawatt per hour earlier in the day before the temperature spiked. 

This illustrates how utilities pay more for electricity during peaks. As a result, the cost of peak demand ultimately shows up on residential and business utility bills. 

How higher peak demand drives higher transmission and distribution costs 

Distribution system spending represents a growing share of utility capital expenditures, driven by aging infrastructure, increasing equipment costs, and rising demand. In many cases, utilities build infrastructure designed to serve only a small number of annual peak hours. A significant share of utility capital expenditure – which translates higher bills for ratepayers – goes toward distribution system spending. This is spending on poles, wires, new substations and transformers, and other major equipment investments. The higher peak rises, the more of this equipment utilities pay for on the backs of ratepayers. 

Rising peaks, rising bills 

With summers growing hotter and weather patterns getting more severe, the grid is experiencing a rising number of peak demand days every year. Load growth has also contributed to the growing frequency of peaks. Load growth is the increasing demand for energy from developments such as data centers and electrification. With the causes of peak demand increasing in frequency every year, the related affordability issue becomes ever more apparent. 

Just this July, the average electricity bill in the United States reached an all-time high of $217. While July is usually the month with the highest electricity prices, the continuing increase of intense heat waves and subsequent strain on the grid is evident in this year’s record-breaking utility prices. 

The solutions are in our homes and businesses 

This problem, however, is not without solutions. Demand-side solutions – like virtual power plant (VPP) programs that pay for peak reduction and local power generation during peak hours – can shave the top off the peaks, helping to stave off reliability threats and keep prices reasonable by meaningfully reducing peaks demand. 

For example, on a hot day, a smart thermostat can automatically reduce a building’s temperature by one degree, lowering energy consumption across thousands or even millions of energy users at a given time, while barely affecting comfort in each individual household or office building. 

This is an example of a VPP that pools small demand reductions (and generation) from thousands of local distributed energy resources (DERs) to manage peaks. These are devices such as plugged-in electric vehicles, rooftop solar and home battery systems, smart thermostats, batteries, and heat pumps. Though each device contributes a few kilowatts, networked together, they can rival traditional power plants in scale – delivering hundreds of megawatts of relief to the system. VPP programs are increasingly common, and compensate customers for their devices’ contributions during peaks, just as utilities have traditionally compensated the owners of peaker power plants. 

Across the U.S., states and utilities took 106 policy and program steps to set up programs like this in 2025 alone. The sum total of all capacity to support the grid across U.S. VPPs grew 13.7% from 2024 to 2025, according to a 2025 Wood Mackenzie report. 

Affordability and VPPs 

By utilizing devices in homes and businesses to help balance electricity demand and supply, these VPP programs can reduce strain on the grid and the risk of blackouts, help prevent the use of expensive peaker plants, and reduce spending on transmission and distribution infrastructure by allowing the grid to draw from residential and business devices instead. This is the most affordable way to manage the electric grid as peaks rise all, protecting ratepayers from paying more on their bills. 

The benefits are already showing up on bills for the states that have taken action on VPPs. 

For example, the ConnectedSolutions VPP program in Massachusetts is saving ratepayers more and more money each year as it expands. In 2025 alone, the program in Massachusetts cost ratepayers $19 million and provided $51 million in direct ratepayer benefits – for net ratepayers benefits of $32 million. 

In another example, in 2025, peak demand related to a heatwave in Vermont was managed by Green Mountain Power’s VPP system, saving 275,000 customers an estimated $3 million. These price reductions can be experienced across the U.S. as long as legislators, residential customers, and businesses continue to embrace demand-side solutions and VPPs. 

The Department of Energy estimates that by meeting 10-20% of 2030 peak with VPPs, the U.S. could spend over $10 billion less on grid infrastructure. As load growth continues and peak demand rises, tapping into demand-side solutions is proving to be a cost-effective and fastest-to-deploy route. These are tools uniquely designed to deliver grid capacity during the few hours a day when the most electricity is needed.