Small Business Electricity Rates: Demand Charges Explained

Commercial electricity pricing uses an entirely different structure than what you're used to at home.

Residential customers pay primarily based on total kilowatt-hours consumed. Pretty straightforward. Commercial accounts? Two-part billing with both energy charges AND demand charges. That second part trips up almost everyone.

Here's the thing most business owners miss: demand charges alone typically represent 30-70% of a small business electric bill. Yet when they shop for suppliers, they focus exclusively on the per-kWh rate. That's like comparison shopping for a car by only looking at the sticker price while ignoring the financing terms.

This matters because strategies that work for residential customers often fail for commercial accounts. The tip about running appliances at night? Doesn't help when your demand spike happened during the Tuesday lunch rush. Understanding how these charges split is the first step toward cutting costs.

Commercial accounts also access contract terms and rate structures unavailable to residential customers—opportunities savvy business owners use for substantial savings.

Demand charges measure your highest power draw during any 15-minute interval within a billing period. The kicker? Hit a spike once and you pay that peak demand rate for the entire month.

Picture this: it's a hot Tuesday afternoon, your HVAC is cranking, the kitchen equipment is running, all the lights are on, and someone starts the commercial ice machine. That 15-minute window just set your demand charge for the next 30 days.

Let's run the numbers on a restaurant peaking at 50 kW. With a $12/kW demand rate, that's $600/month before you've used a single kilowatt-hour of electricity. A business consuming 10,000 kWh monthly might pay $800 in energy charges but $1,200 in demand charges. Demand becomes the bigger bill.

Why does this charge exist? Utilities must maintain infrastructure capacity to meet your maximum demand, even if that peak occurs briefly. They build for your worst 15 minutes, so they bill for it.

Most small business owners have never examined their demand patterns. They're leaving substantial savings untapped through simple load management strategies we'll cover later.

Businesses can choose from several rate structures, each optimized for different usage patterns. Getting this wrong costs you money every month.

Flat rates give you a consistent price per kWh regardless of timing. Simple, predictable, but rarely the cheapest option. These work for businesses that can't shift when they operate.

Time-of-use (TOU) rates vary by hour, with peak pricing running 50-100% higher during afternoon hours (typically noon-6 PM weekdays). If you can shift operations to off-peak hours—think a bakery that runs ovens at 4 AM instead of 2 PM—these rates can save you thousands.

Demand-based rates combine energy charges with peak demand fees. They reward businesses with steady, consistent power consumption. Manufacturing with constant load? This might be your structure.

Interruptible rates offer lower pricing in exchange for allowing brief service reductions during grid emergencies. Most small businesses won't qualify, but larger operations might find this worthwhile.

The best structure depends on when and how your business consumes power. A restaurant has completely different needs than a warehouse.

A commercial electric bill contains several distinct charges that residential bills lack. Here's what each line means.

The supply charge covers the electricity commodity itself—the kWh your business consumed. This is the only part you control by switching suppliers. Delivery charges pay for utility infrastructure maintenance, and you'll pay these regardless of who supplies your electricity. Demand charges appear as a separate line showing your peak kW and the rate applied. Capacity charges fund grid infrastructure investments and vary seasonally. Transmission charges cover moving power from where it's generated to your local distribution system.

Here's something to keep on your radar: PJM Interconnection (serving Ohio and Pennsylvania) saw capacity prices surge 833% for 2025-2026. That's not a typo. These costs will flow through to your bills.

What can you control? You choose your supplier, which affects supply charges. You make efficiency improvements to reduce total kWh consumption. And you manage your peak demand to lower those demand charges. Understanding which component you're looking at reveals which cost reduction strategy applies.

Commercial electricity costs vary dramatically by state due to different generation mixes, transmission constraints, and regulatory structures. Same business could pay twice as much just by being across a state line.

Ohio offers some of the best commercial rates in the region. Typical supply rates run 8-12¢/kWh, and switching suppliers yields 15-30% savings for most businesses. Six major utilities serve the state: AEP Ohio, Duke Energy Ohio, AES Ohio, and the FirstEnergy companies (Ohio Edison, Toledo Edison, Cleveland Illuminating).

Pennsylvania businesses access competitive supply through PECO, PPL Electric, and Duquesne Light. Average commercial savings through supplier choice hit about $1,200 annually. The market is mature with plenty of supplier options.

Massachusetts has the highest commercial rates nationally at 21.92-30.63¢/kWh. Transmission constraints and natural gas dependency drive those prices. The silver lining? Mass Save programs offer substantial rebates to offset higher base rates. If you're a Massachusetts business, efficiency investments have faster payback than anywhere else.

Unlike residential customers who accept posted rates, businesses possess genuine negotiating power. Use it.

Start by getting multiple quotes—at least five suppliers. The spread often exceeds 20%, which is real money. Tell suppliers explicitly that you're comparing options. They'll sharpen their pencils when they know you're shopping around. Timing matters too. Spring and fall rates typically run 5-15% lower than summer and winter when demand peaks.

Contract length involves tradeoffs. Longer terms (24-36 months) get you lower rates but less flexibility if prices drop. Shorter terms (12-18 months) cost more monthly but let you reposition as markets shift. In the current environment with elevated wholesale prices expected to moderate, shorter terms might make sense.

If your business uses 100,000+ kWh annually, you've got more leverage. Request custom pricing rather than accepting standard rate sheets. Consider index-plus pricing that tracks wholesale markets with a margin on top—it can beat fixed rates in declining markets, though you take on more risk.

Reducing peak demand often delivers faster ROI than efficiency upgrades. You're not reducing total consumption—just flattening when it happens.

First, identify your peaks. Request interval data from your utility showing 15-minute consumption patterns. (They have this; just ask.) Common culprits include HVAC startup surges, equipment running simultaneously, and EV charging during business hours.

Once you know when peaks happen, you can do something about them. Stagger equipment startup so you're not powering everything at once. That manufacturing facility that reduced demand charges 35%? They just delayed compressor startup by 15 minutes after opening. That's it. No capital expenditure.

Demand controllers automatically shed non-critical loads when you approach peak thresholds. Pre-cooling your building before peak pricing periods shifts that demand to cheaper hours. Battery storage can shave peaks by 30-50%, though you're looking at 4-7 year payback—worth running the numbers for larger operations.

The simplest wins come from changing behavior, not buying equipment.

Efficiency investments reduce both energy charges and demand simultaneously. Double benefit.

LED lighting retrofits deliver 50-70% energy reduction with a 2-3 year payback. If you haven't switched yet, this is table stakes. HVAC optimization through programmable thermostats, regular maintenance, and economizer controls pays for itself quickly. Variable frequency drives cut motor energy use 20-50%—big savings if you've got compressors, pumps, or fans running constantly. Occupancy sensors eliminate waste in warehouses, restrooms, and conference rooms where lights run for nobody.

Good news: you don't have to pay full price. Massachusetts businesses get Mass Save incentives covering up to 80% of efficiency upgrade costs. That's not a typo—80 percent. Ohio utility rebates cover 30-50% of LED and HVAC projects. Pennsylvania offers Act 129 programs with zero-interest financing for larger projects.

Before you buy anything, check what rebates apply. Many utilities cover 30-50% of project costs, dramatically improving your ROI.

Commercial electricity is different from residential—demand charges, capacity costs, and complex rate structures require specialized analysis. That's where our commercial energy team comes in.

How it works: Submit a quick request with your business details. Our team analyzes your usage patterns, shops multiple suppliers on your behalf, and presents you with custom quotes—typically within a few business days.

Typical savings run 15-25% on supply costs compared to utility default rates. The consultation is free, and if you switch through us, suppliers pay our fee—not you.

Why use us instead of going direct? We negotiate with multiple suppliers simultaneously, understand the nuances of commercial rate structures, and handle all the paperwork. You get better rates with less hassle.

We serve businesses in all deregulated states including Texas, Ohio, Pennsylvania, Massachusetts, and more. Request your free quote today.

You can start optimizing your commercial energy costs this week. Here's what to do.

First, gather 12 months of electric bills. Look at your average demand (kW) and consumption (kWh). This baseline tells you where you stand. Then request interval data from your utility—it shows 15-minute usage patterns and reveals demand reduction opportunities you probably don't know exist.

Next, request a free commercial rate analysis from our team. We'll review your usage, shop multiple suppliers, and find savings opportunities you'd miss on your own. If your operations allow schedule flexibility, we can also evaluate whether time-of-use rates could work for you.

Schedule a free energy audit. Texas, Ohio, Pennsylvania, and Massachusetts all mandate utility-funded audits for commercial customers—it's free money on the table.

Finally, implement one demand management strategy this month. Stagger equipment startup. Adjust thermostat schedules. Install occupancy sensors in areas that sit empty half the day.

Small changes compound into substantial savings. But you have to start somewhere.