What is an Electricity Demand Charge? And How Can You Reduce It?
Business owners are generally focused on execution. This means aspects that are not related to execution, like electricity demand charges, are likely not front and center. However, have you ever taken a peek at your business utility bill and wondered why the bill has fluctuations when it seems your energy usage doesn’t change? The answer may be found in the costs on your bill called electricity demand charges. In this post, we’ll walk you through what demand charges are, how they work, and ways you may be able to manage your demand change costs more effectively.
Understanding Electricity Demand Charges
What are Demand Charges?
Electricity demand charges can be a significant portion of your commercial electricity bill. These costs are paid to the utility to ensure it can provide the electricity you need at any given moment, including during peak usage periods on the grid.
Generally speaking, residential customers do not have a demand charge on their bills. These charges are typically found on commercial and industrial electrical customer’s bills. Utilities want to ensure they can provide power to these large customers no matter the time of day and year.
How Do They Work?
A demand charge is calculated based on a business’ highest level of electricity demand during a 15-minute interval in a billing period. You can think of a demand charge as the maximum amount of electricity a business needs at any one point in time.
One of the primary reasons demand charges exist is that the utility is prepared to provide its customers with an uninterrupted power supply at all times. In exchange for providing this service, the utility charges its customers who front the costs.
Why Do Demand Charges Matter?
Depending on the type of customer, demand charges can represent a significant portion of the costs on an electricity bill. In some cases, demand charges exceed the volumetric rate (energy charge) for commercial and industrial customers.
CFOs know that cost control is a key strategy to profitability. So, one area a business may be able to control its costs is by understanding not only how demand charges work but also when to reduce demand. This reduction in demand, when timed correctly, can lead to lower demand charge costs.
The Relationship Between Consumption and Demand
Consumption (energy) charges are based on the total amount of electricity consumed over time like a billing period. You generally see consumption charges measured in either kilowatt-hours or kWh. Sometimes, you may see consumption charges measured in megawatt-hours or MWh.
In contrast, demand charges are tied to the rate at which electricity is consumed, measured in kilowatts or kW or megawatts or MW. Note that, unlike energy charges, demand charges are not proportional to your total energy consumption.
An Example to Clarify
Imagine there are two businesses - business A and B. Business A consumes electricity at a steady clip throughout the month at let’s say 10,000 kWh. Business B consumes electricity at an irregular pace typically in short bursts - think a manufacturing facility.
It’s likely that business B will have a higher demand charge because its peak demand for electricity during these short periods is higher than business A. The utility, ensuring it can meet demand for all customers at all times, charges customer B more because it needs to supply uninterrupted power to customer B even during peak demand on its grid.
Conclusion
Electricity demand charges can be an unfamiliar concept if you haven’t dug deep into how your utility calculates your business electricity bill. However, knowing what demand charges are and how to reduce your demand during the 15-minute intervals when a utility calculates your peak demand can reduce your total electricity cost exposure for your business.
