Demand Charges Explained
There are two parts to a commercial electricity bill: Energy charges are based on the total amount of electricity you use, while demand charges are based on your highest “peak usage”. These demand charges are determined by the highest 15-minute average usage recorded on your demand meter that month.
In other words, if your facility only uses a lot of power briefly, your entire monthly bill will have demand charges based on that brief peak demand. If your power use is more consistent throughout the month, your demand charges will make up a much smaller part of your bill.
Electric utilities issue demand charges to help offset the cost of delivering a consistent level of energy to their customers. When tens of thousands of customers are simultaneously maximizing their use of electricity, the utility’s ability to deliver electric service is strained. Demand charges are applied to help pay-down the costs of maintaining the utility’s delivery system (the power lines) and preserve power availability for all customers across the grid.
Additionally, demand charges are intended to incentivize customers to both reduce their peak energy usage, and shift their energy usage to non-peak times of day.
As a result, utilities charge higher rates to customers with highly variable energy usage and charge lower rates to customers with more consistent energy demand.
Demand charges primarily impact commercial and industrial energy customers. Even though commercial and industrial customers might only experience a single peak demand event during a given billing period, that single random demand peak can drive 20-50% of your total cost of electricity for the entire month. And while the general price of energy is decreasing, demand charges continue to grow.
Gary Morsches, CEO of DemandQ, sat down with Arne Hessenbruch, Lecturer at MIT on innovation, to discuss the economics of buying electricity, how to reduce peak demand charges, and the need to act for large electricity consumers for the sake of all commercial & industrial users. You can access the entire interview from our Demand. Tamed. page.