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Understanding Electricity Demand Charges

In order to properly manage your facility’s energy usage, it is important to understand the basics of electricity billing.  Your commercial electricity bills include more than just the energy you actually used during the given billing period.  The total cost includes not only your energy consumption, but also a charge for how much stress you put on the grid to meet your demand at all times.  These demand charges could account for more than half of your bill in certain territories, rate classes, and months of the year.  This post will help break down the difference between your electricity usage (kWh) and your demand (kW) so you can make smarter energy decisions.

What is the difference between usage and demand charges?

To put it simply, kWh is a measure of consumption, while kW is a measure of demand.  The kWh charge (consumption) is the measurement of the amount of energy the building uses over the given period of time.  The kW charge (demand) represents the amount of energy consumed at a single point in time.  An intuitive way to visualize this is through the car speedometer/odometer metaphor.  The rate at which you are using electricity (kW) is comparable to the speed you are driving the car (speedometer).  Your actual consumption (kWh) is similar to the total distance in miles that is driven by the car over a given time period (odometer).
For example, look at the consumption and demand profile below.  The sum of all of the hourly demands (the blue line) over the time period equals 293,892 kWh.  The maximum hourly demand (orange dot) is the peak kW for the time period (808 kW).  On this sample August invoice in Con Ed territory, the consumption related charges are only 15% of the invoice, while demand charges represent 76% of the invoice (remaining 9% are customer and meter charges and taxes).  This invoice represents just the T&D charges, not the supply/generation charges.  For more on how peak demand affects supply costs, read our Peak Load Management Primer.

demand charges

Why am I charged for this?

Having this capacity readily available to meet the peak demand on the grid at all times costs money, and this cost is spread across customers (i.e. you) who may only occasionally need this capacity to meet their building operations (likely just a few hours per year).  To remain reliable in serving you with the energy your building needs, the utility must be prepared to meet the highest cumulative peak demand (think 4pm on a weekday on the 3rd day of a heat wave), and they do this through infrastructure investments that enable them to meet this need (e.g. transmission and distribution lines, substations, generation, and popular today, non-wires alternatives such as energy efficiency and distributed energy resources).

To manage your energy expenses, it is extremely important to monitor your demand, not only because of these monthly charges on your T&D bill, but your demand also impacts your monthly costs for capacity and transmission.  Knowing exactly when and how your power is being used in your building is essential to limiting demand, decreasing consumption and emissions, and ultimately lowering costs.  Learn more about how our watchwire platform gives you the knowledge to analyze your energy data in a cloud-based, centralized platform.