What Are Demand Charges in an Electricity Bill?

Electricity bills for commercial and industrial customers often include charges beyond just the total energy consumed. While kilowatt-hours (kWh) measure overall electricity use, demand charges are a significant and often overlooked component. This charge can substantially impact a business’s monthly utility expenses. Understanding demand charges is essential for businesses seeking to manage their energy costs effectively.

Defining Demand Charges

Demand charges are a fee levied by utility companies based on the highest rate of electricity usage, or power, recorded during a billing period. Unlike energy consumption (kWh), which reflects the total volume of electricity used over time, demand (kW) indicates the instantaneous peak power drawn. This distinction is important: a business could use a relatively low total amount of energy but still incur high demand charges if its power usage spikes significantly, even for a brief period.

Utilities implement demand charges to maintain a robust infrastructure capable of meeting peak electricity demands. Power plants and transmission lines must be sized to handle the maximum load customers might collectively require, not just average consumption. These charges help utilities recover the costs of building and maintaining this capacity, ensuring reliability during high simultaneous usage. Demand charges are applied to commercial and industrial customers, as these segments often have equipment that can create substantial power surges.

Measuring and Calculating Demand

Utilities measure electricity demand over short, fixed intervals, such as 15-minute or 30-minute periods. Throughout the billing cycle, the utility monitors the average power drawn during each interval. The single highest average power recorded during any measurement period becomes the customer’s “peak demand” for that month, expressed in kilowatts (kW).

To calculate the demand charge, the peak demand (in kW) is multiplied by the utility’s specific demand charge rate, typically expressed in dollars per kilowatt ($/kW). For instance, a business with a peak demand of 50 kW and a utility rate of $15/kW would have a demand charge of $750. Rates vary by utility and may incorporate time-of-day or seasonal variations, leading to higher charges during certain hours or seasons.

Interpreting Your Electricity Bill’s Demand Charges

Locating demand charges on an electricity bill is an important step for commercial customers. These charges are typically listed as a separate line item from energy consumption charges (kWh). While total energy consumed (kWh) reflects the overall volume of electricity used, the demand charge (kW) represents the highest instantaneous power draw during the billing period.

Understanding both components is important because they collectively form a significant portion of the total electricity bill. For many commercial and industrial accounts, demand charges can constitute a substantial percentage, sometimes ranging from 30% to 70% of the total monthly cost. Even if a business reduces overall energy consumption, a high peak demand, even if momentary, can still lead to a considerable demand charge, highlighting the need to manage peak power usage.