A Closer Look at Commercial Electricity Demand Charges, and How to Lower Them

Utility power lines must support unpredictable energy usage for businessesLike most commercial customers, you’re probably paying thousands of dollars every month for electricity. But do you really understand how those costs break down—and what, if anything, you can do to keep from paying more than you have to? 

The fact is, a significant portion of your monthly energy bill may be made up of what’s known as commercial electricity demand charges. But what are “demand charges” exactly, and why do utility companies add them to your bill? Are there ways to reduce these demand charges, so you pay for the electricity you actually use rather than the electricity you might use? Let’s take a closer look!

What are demand charges and how do they fit into your utility rate structure?

As a commercial customer, you likely see—and pay for—two types of charges on your monthly utility bill. 

  • The first of these is your energy charge, which is calculated by multiplying your total energy use for the month (measured in kilowatts-hours) by your energy rate. Simple, right?
  • The other charge you’ll see on your monthly bill is a little more complicated. It’s what’s known as a demand charge and is typically calculated by looking at the greatest amount of power (measured in kilowatts) you need during any of thousands of “demand intervals” that make up a billing cycle*. In most instances, a demand meter literally measures (and averages) your power “demand” in 15-minute timeframes throughout the month, and reports this information back to your utility*. This reported peak-kilowatt level is then multiplied by a specific rate, which determines your demand charges. For example, if your utility charges $10 per kilowatt (kW) per month, and your peak-demand interval power requirement is 100 kW within a month, you’ll pay $1,000 in demand charges that month ($10 x 100 kW). Remember, this is on top of your energy charge.

Why are demand charges applied to energy usage in business?

Learn how to lower commercial electricity costs by reducing spikes in demand Utility companies are responsible for making sure they can provide the maximum amount of electricity that you might need at any point in the day. For example, if your utility company sees you require 100 kW just once over the course of the month, they have to be prepared to deliver that amount of power whenever you might need (or “demand”) it. 

For utilities, the real challenge comes in maintaining enough capacity to satisfy your and all their customers’ electricity needs (for instance, on a hot day when everyone’s running their AC at the same time). To do that, utilities must keep all sorts of expensive equipment on constant standby “just in case,” including substations, transformers and generating stations. This capacity is extremely expensive to build and maintain, and commercial electricity demand charges are used to help pay those costs.

How are commercial electricity demand charges calculated?

As we’ve seen, demand charges are usually calculated based on your highest 15-minute average usage over a given month*. If you consistently use energy at or close to that level over the month, those demand charges will generally make up a smaller portion of your bill. But, if your facilities tend to use a lot of power over short periods of time, demand charges will make up a much larger part. Essentially, you’ll be paying more as a result of your usage spikes. Let’s take a look at a couple of examples.

  • Company A consistently requires 100 kW over the course of a 720-hour month. That means their energy usage is 72,000 kWh (100 kW x 720 hours). If their utility charges 10 cents per kWh, they’ll pay $7,200 in energy charges. Their utility also has a demand charge of $8 per kilowatt per month, so because Company A’s maximum power requirement for any demand interval was 100 kW, they’ll also pay $800 in demand charges for the month ($8 x 100 kW). In this example, demand charges represent 10% of Company A’s total electric bill of $8,000. 
  • Company B uses less electricity over the month: just 10 kW per hour for 719 hours. However, they do use 100 kW for one hour every month to start up and bring their machines on line (which requires a much heavier power load). That means their monthly energy usage is 7,190 kWh + 100 kWh = 7,290 kWh. At 10 cents per kWh, they pay $729 in energy charges for the month. But they’ll also pay $800 in demand charges, because their maximum power requirement was also 100 kW—even though this peak power need is only for an incredibly small portion of the month. In this example, demand charges represent 52% of Company B’s total electric bill of $1,529. That’s huge.

Utility rate structure and individual usage determine commercial electricity demand charges

3 ways to reduce your demand charges and lower electricity costs in your business

1. Evaluate your organization’s energy usage to reduce peak demand

The quickest, most inexpensive way to reduce your commercial electricity demand charges is to be mindful of your usage. To help keep peak demand low, consider:

  • Installing energy-efficient equipment and finding other smart ways to reduce your energy usage in business.
  • Downsizing your equipment to fit the job. Equipment that’s larger than it needs to be can unnecessarily increase demand.
  • Rescheduling your company’s most energy-intensive activities at lower-load times of the day. That way, you can even out your usage and reduce any high spikes in demand.

2. Invest in a commercial solar energy system

A great way to bring down demand charges is to invest in a commercial solar panel system, which generates electricity directly from the sun—often during peak usage hours—and subsequently reduces your demand from the grid, and potentially your peak power requirement. 

Keep in mind, however, that a single spike in demand—on a cloudy day or at night, for example, when the solar system is not at full production—will trigger the same high demand charge for the entire month* as if the solar system were not installed. That’s where commercial solar storage can help. 
3. Implement an energy storage solution

If you’re looking to consistently reduce your monthly demand charges, energy storage through batteries offers a smart way to do it. As we’ve seen, even if you generate a majority of Reduce energy usage in business by implementing commercial solar storageyour energy through a commercial solar system, you may still experience high demand charges due to power demand spikes when the sun isn’t shining. By storing the energy generated by your solar panels in batteries, then dispensing that energy to offset your needs at times of high demand, you can flatten those peaks and pay less in monthly demand charges.

Before you can begin to reduce your organization’s demand charges, you need to know where they’re coming from. Ask your utility company for a detailed breakdown of your electricity use over the course of the month. Then, look for ways to reduce spikes in demand through a combination of more efficient usage throughout the day, a solar system to offset your organization’s usage and commercial solar storage to level out those peaks when solar isn’t feasible. Used in combination, these solutions could save your business tens of thousands of dollars every year. 

* Check with your local utility to confirm their rate structure.

Related links:

Everything You Need to Know about Commercial Solar Battery Storage

10 Simple Ways to Reduce Business Energy Costs

5 Steps to Establishing Energy Efficiency in Business

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