Electric bills can be confusing. They often have line items you don’t understand. One common and confusing part of a business electric bill is the demand charge.
Energy charges are based on how much electricity you use over time. This is measured in kilowatt-hours (kWh). Demand charges are different. They are based on the highest amount of electricity you use at one time. This is measured in kilowatts (kW).
In this guide, we will explain what demand charges are. We will show you how they work. Most importantly, we will explain how they can affect your monthly electric bill.
Whether you are a business owner, a facility manager, or just want to understand your energy costs, this article is for you. It will help you learn how to take control of your power bill.
What Is a Demand Charge?
A demand charge is a fee from the utility company. It is based on your highest power use during a short time. This is usually the highest 15 or 30 minutes in a billing cycle.
Energy charges measure how much electricity you use. Demand charges measure how fast you use it.
For example, your business normally uses 30 kW of power. But one morning, your systems, HVAC, and machines all turn on together. This creates a short spike of 100 kW for 15 minutes. Your demand charge for the whole month could be based on that 15-minute spike—even if it only happened once.
Why Do Utilities Charge for Demand?
Utilities need to generate and deliver enough electricity to meet the highest levels of demand at any moment. Demand charges help utilities:
- Recover infrastructure costs required to handle peak loads.
- Encourage consumers to spread out usage instead of creating spikes.
- Maintain grid reliability during high-load events.
Think of it like this: if everyone in a city turned on every light, air conditioner, and appliance at once, the utility must be prepared to supply all of that electricity, regardless of whether the average usage is lower throughout the day. That preparation comes with a cost.
How Demand Charges Are Calculated
Demand charges vary by utility company and rate structure, but typically follow a basic formula:
Demand Charge = Peak Demand (kW) × Demand Rate ($/kW)
Here’s how it works:
- Utilities measure your peak demand over a defined period (like a 15-minute interval).
- They multiply this peak by a fixed rate ($ per kW).
- That amount is added to your monthly bill—on top of your regular energy charges.
For example:
- If your peak usage during the month is 100 kW
- And your demand rate is $15 per kW
- Your demand charge = 100 kW × $15 = $1,500
This charge is in addition to what you pay for the actual electricity you consume (kWh).
How Demand Charges Affect Your Bill
Demand charges can make up 30% to 70% of a commercial or industrial electric bill, depending on your usage patterns and your utility’s pricing structure. Two businesses using the same amount of electricity overall could have very different bills if one has a higher peak demand.
Let’s look at an example:
- Business A spreads its usage evenly: 50 kW consistently.
- Business B has spikes: 30 kW most of the time but one spike to 90 kW.
Even though both businesses may consume a similar number of kWh during the month, Business B will pay more in demand charges due to that single peak.
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Factors That Influence Your Demand Charges
Several factors can lead to higher demand charges:
- Starting up large equipment all at once
- Simultaneous operation of HVAC, lighting, and machinery
- Weather-related surges (hot summers = higher AC demand)
- Unexpected usage spikes from equipment malfunctions
Even relatively short periods of high usage can result in large demand charges.
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Strategies to Reduce Demand Charges
The good news is that demand charges are not set in stone. With some strategic planning, businesses can significantly reduce their demand costs. Here are a few effective approaches:
1. Stagger Equipment Start Times
Avoid powering up all machines or HVAC systems at once. Use automated controls to stagger startup times and smooth out your load.
2. Implement Energy Management Systems (EMS)
An EMS can monitor energy use in real-time, detect peaks, and automatically adjust non-critical loads to reduce demand.
3. Use Demand Controllers
These systems monitor electricity usage and temporarily cycle off equipment during peak periods to keep demand below a set threshold.
4. Install On-Site Energy Storage
Battery systems can supply power during high-demand periods, offsetting your grid usage and lowering peak demand.
5. Shift Load to Off-Peak Hours
Run energy-intensive processes during early morning, evening, or overnight when overall usage is lower.
6. Schedule Preventative Maintenance
Properly maintained equipment runs more efficiently and reduces the risk of demand spikes due to mechanical issues.
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Should You Be Concerned About Demand Charges?
If you run a business or factory, yes ,you should care about demand charges. They make up a big part of your energy bill. Many people miss them because they only look at how many kWh they use.
Checking your utility bills often, knowing your demand patterns, and fixing problems can save you a lot of money. Working with an energy expert or demand management company can make your business even better and save you more money.
Real-World Example of Demand Management
Let’s say a manufacturing plant was consistently hit with high demand charges. After an energy audit, the facility implemented an automatic control system to stagger equipment startup and added a battery backup for critical loads.
Result:
- Demand charge reduced by 30%
- Annual savings of $20,000
- ROI achieved in under two years
This kind of proactive management can turn your utility bill into a strategic advantage.
Conclusion: Take Control of Your Energy Costs
Understanding demand charges is very important if you want to save money. Demand charges are based on your highest use of electricity, not just the total use. By finding peak demand times and making changes, businesses can save a lot of money.
You can use different tools to help. These include changing how you work, using automatic systems, or getting help from Great Energy 1 experts. The first step is knowing about it—and you have just done that.
Need Help Managing Your Demand Charges?
If you’re unsure how demand charges are impacting your bill or want help identifying cost-saving opportunities, our energy experts can help. Contact us today for a no-obligation utility bill review.