Demand 101: Understanding What It Is and How It Impacts Your Electric Bill

Written By: Sue Pierce, Founder/CEO

Electric utility bills can be very confusing. First, each monthly bill can contain charges for 10 – 18 different items, each with its own rate formula and calculation. Second, the rates for some of these 10 – 18 items can change throughout the year. This article discusses one of the costlier charges impacting your electric bill and an item many do not understand - demand charges. We will explain what demand is and briefly discuss the impact it has on your electric costs.

To understand the differences between electric consumption and demand, we will use an economic model. The price we pay for things we buy contains the cost of the (1) product plus (2) profit plus (3) overhead, the cost of making the product available for sale. With electricity, what we use in kWh is the product, called consumption. This is largely made up of fuel costs incurred in the actual generation of energy. Demand (KW) is the overhead. Meeting the needs of a variety of customers with a variety of energy consumption habits requires keeping a large amount of expensive equipment (e.g., transformers, wires, substations, and even generating stations) on constant standby. Demand charges allow utility companies to recoup the cost of maintaining this equipment. Demand charges make up 30-70% of a commercial and industrial customers’ total electricity costs.

Many utility companies charge for demand by taking the highest average demand in a 15 minute period of time during the month and charging for demand based on that KW amount. This high demand period is referred to as the “maximum demand period”. Utility pricing policies are designed to pass savings on to customers who have a steady and constant pattern of energy use and demand. Customers who have a more erratic pattern of energy use are charged higher fees for demand. For example, if you own a factory with an automated assembly line that runs 24/7, your need for energy is predictable and steady. Thus, your demand rates are lower. If you are a K-12 school that uses energy differently throughout the day, needing energy during school hours but not at night, on week-ends, or during holidays, your use is less predictable and you will pay more for demand.

Demand charges are increasing across the U.S. as consumption charges are decreasing. Several trends will continue to keep demand charges high. Let me identify two here. First, as the electric grid ages and requires more maintenance and infrastructure updates, the costs are passed along as demand charges. Second, the use of solar and wind power is increasing; however, the amount of power generated from these sources varies over time and can be affected by factors such as cloud cover or lack of wind. There will be greater sensitivity to peak loads because when cloud cover or lack of wind reduces energy generation, the local utility company must off-set the needed electricity.

Managing demand translates into saved dollars! To maximize savings, it is important to closely measure and monitor demand over time. Monitoring interval and real time demand data helps identify equipment and behavior-related problems so that they can be corrected quickly. Strategies for reducing peak demand, often called load shifting strategies, provide an opportunity to significantly reduce electric utility bills. Remember, you cannot manage what you don’t measure!

Do you want to cut energy costs by implementing load shifting strategies but do not know where to begin? Pierce Energy Planning can help you get started and on the road to success!