Electricity Demand Charges

Electricity is unique because it has to be generated at the very same time as it is used.  It is not like liquid fuels that can easily be stored for later usage. Although battery storage is emerging as a way to store electricity, it is an emerging technology and usage is still small at this time.

So, power companies have to generate sufficient electricity during peak periods of usage. This means that power companies need to have enough standby equipment such as transformers, sub-stations, and generation facilities to meet all of their customers’ demand.

Electric utility bills are generally comprised of three types of charges.

  • Fixed charge for being connected to the grid. This charge is unavoidable and may be considered as a cost of doing business.
  • Charge for the amount of energy consumed.  This charge is expressed in dollars per kilowatt-hour (kWh).
  • Demand charge based on the maximum kW’s used. This charge is expressed as dollars per kilowatts (kW) based on the maximum number of kilowatts used at a point in time.

Let’s examine the difference between electricity usage and electricity demand.  Usage is the amount consumed over a period of time (e.g. month) expressed in kilowatt hours (kWh).  Demand is the rate at which electricity is used at a point in time expressed as kilowatts (kW).

Instead of electricity, it might help you to think of watering your garden for two hours. The rate at which the water is flowing out of your garden hose is demand. The amount of water flowing out over the two-hour time period is usage.

A business’s rate of electricity usage varies during the 24-hour period.  But based on its past track record, the power company knows the business’s peak usage. So, the power company needs to have production facilities to meet the peak rate, even though the rate of usage is much less during the rest of the day.

The graph below shows an example of this fluctuation.  The area below the orange line indicates how much electricity is actually used during a 24-hour period.  This is the amount of electricity you pay for.

Image Source: We Energies

The dotted line at the top of the graph shows the maximum rate of usage (demand) during the period.  This is the amount of electricity generation capacity the power company must have available to meet the demand for usage.  This capacity is often met with what is called “peakers”. These are diesel or natural gas driven electricity generators. Maintaining sufficient power capacity to serve all electric customers at any moment in time is expensive and requires an over-building of generation capacity for utilities.

“Peakers” are used for a very limited amount of time and are a costly to use.  To recoup the cost of the “peakers” and other excess generation, the power company charges a fee to cover the cost of these facilities.  The fee is called demand charge.

Demand charges are based on the amount of excess capacity needed.  The area between the orange electricity usage line and the dotted peak demand line is the demand charge.

Demand charges allow the power company to recover the costs associated with supplying and maintaining excess generation capacity.  Demand charges are typically charged to large commercial, agricultural, and industrial customers. But some power companies also apply them to residential customers.

Electric customers with the greatest power requirements pay for their share of the capacity. It’s not uncommon for large users to have demand charges that comprise more than half of their electricity bill.

Companies can lower their demand charge by reducing their peak demand.  This allows the power company to lower its maximum generation capacity.

Peak demand is often determined by 15-minute periods. The highest usage 15-minute period will establish peak demand for the company for the previous month. and then multiply that by a pre-defined rate to calculate your demand charges

Reducing your Demand Charges

You need to understand when and how you use electricity. The power company should be able to provide a detailed breakdown of your energy consumption throughout the month so you can determine when your peak usage occurs.

Do you turn your high usage loads on at the same time every day? Speading your usage loads out over the day can reduce your peak demand.

Use timers and sensors for start-up time, power-down time, and equipment sequencing such as air conditioning and lighting.

Many utility companies offer programs to lower, offset, or eliminate demand charges. These programs typically require the user to allow the power company to manage your loads to lower peak demand. This helps the utility company lower its cost during peak times of usage.

Using battery storage allows you to store energy from the time it is generated to times of peak usage. Energy storage is an emerging technology that is still quite expensive and requires a significant upfront investment.

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