Demand charges price the highest rate of electricity use
Energy charges accumulate across the month in kilowatt-hours. Demand charges commonly use the highest qualifying average kilowatt reading during one billing interval. If a facility reaches 180 kW and the tariff charges $16 per billed kW, the simple demand component is $2,880. The actual bill can differ because tariffs may include seasonal rates, time windows, minimum demand, power-factor adjustments, or demand ratchets.
kW and kWh answer different questions
| Measure | What it describes | Typical bill use |
|---|---|---|
| kW | Average power during a defined interval | Demand charge |
| kWh | Energy accumulated over time | Volumetric energy charge |
| Load factor | Monthly energy relative to peak demand | Load-shape diagnostic |
A bakery and a warehouse could each use 40,000 kWh in a month. If the bakery turns on ovens, refrigeration, and HVAC together, it may establish a much higher peak than the warehouse. The same energy is then spread across a different load shape and produces a different bill.
Five tariff details that change billed demand
- Interval length: the averaging window used by the meter and tariff.
- Time window: whether demand is priced all day or only during on-peak hours.
- Ratchet: whether a percentage of an earlier peak becomes a minimum billed demand in later months.
- Season: whether summer and winter demand rates differ.
- Qualification rules: minimum kW, voltage level, service type, and other requirements for the rate schedule.
A calculator can screen a scenario, but the tariff is the billing contract. Confirm the current rate sheet, effective date, riders, and definitions before using an estimate for an investment.
How a peak forms inside a small business
Peaks are often caused by overlap rather than one inefficient machine. A restaurant may run cooking equipment, electric water heating, refrigeration, and rooftop units during the same service period. A machine shop may start compressors and several production loads at shift change. An EV site may allow multiple chargers to ramp to full power together.
Interval data is the clearest way to find that overlap. Compare the billed peak date and time with operating schedules, equipment controls, weather, and production records. A peak-reduction idea is valuable only if it lowers the interval that would otherwise set billed demand.
A practical review checklist
- Identify the exact tariff and demand rate on the bill.
- Record billed kW, measured kW, and any ratchet quantity separately.
- Download interval data for at least one complete billing cycle.
- Mark the time and duration of the highest intervals.
- Match those intervals to equipment and operating events.
- Model savings only after identifying a controllable contributor.
Frequently asked questions
What is a demand charge on a commercial electricity bill?
A demand charge is commonly based on the highest average power draw, measured in kilowatts, during a utility-defined interval in the billing period. The rate and measurement rules come from the customer tariff.
Is demand the same as electricity consumption?
No. Demand in kW describes the rate of electricity use during an interval. Consumption in kWh describes the total energy used over time. Two businesses can use the same monthly kWh but have different demand charges.
How long is a utility demand interval?
Fifteen minutes is common, but intervals and calculation methods vary. Some tariffs use 30-minute windows, rolling intervals, time-of-use demand, seasonal rates, or ratchets.
Can one short equipment start create the billed demand?
It depends on the interval and meter. A very brief inrush event is usually averaged within the utility interval, but several large loads starting or operating together can raise interval demand.