The Bottom Line
Demand charges bill you for the highest power draw you hit during a billing period—even if it only lasted 15 minutes. One bad spike can cost you hundreds of dollars for an entire month.
What are demand charges?
Your electric bill has two main components: energy charges (measured in kWh) and demand charges (measured in kW). Think of it like a water bill:
- 1Energy charges = how much total water you used (gallons)
- 2Demand charges = the size of the pipe you need (flow rate)
Utilities measure your demand in 15-minute intervals throughout the billing period. The single highest 15-minute average becomes your "peak demand" for that month—and that's what you're billed for.
Why demand charges exist
Utilities don't just generate electricity—they build and maintain an entire infrastructure to deliver it. Transformers, substations, wires, and generation capacity all need to handle your peak power needs, even if you only hit that peak once a month.
Real-World Example
Imagine two businesses that both use 10,000 kWh per month. Business A runs steady equipment 24/7. Business B runs heavy machinery for just a few hours each day. Even though they use the same total energy, Business B requires the utility to have much more capacity available "just in case." Demand charges ensure B pays for that extra infrastructure.
How demand is measured
Your utility's meter records power consumption continuously and calculates the average for each 15-minute interval. Here's how it works:
- 1Meter records continuously
Your smart meter tracks power draw in real-time throughout the day.
- 215-minute averages calculated
Each 15-minute window is averaged. A 5-minute spike gets diluted across the full 15 minutes.
- 3Highest interval = your demand
At month's end, the single highest 15-minute average becomes your billed demand.
Critical insight: Hit 100 kW for just one 15-minute period? You're billed for 100 kW all month—even if you averaged only 30 kW the rest of the time.
The math: How demand charges add up
Let's say your utility charges $12 per kW for demand. Here's how different scenarios affect your bill:
| Scenario | Peak kW | Demand Charge |
|---|---|---|
| Normal operations | 50 kW | $600 |
| Started all HVAC units at once | 85 kW | $1,020 |
| Ran backup generator test during peak | 110 kW | $1,320 |
That single 15-minute mistake of starting all HVAC at once? It costs an extra $420/month—potentially $5,000+ per year.
Strategies to reduce demand charges
1. Stagger equipment startups
Don't turn everything on at once. Program HVAC, compressors, and heavy equipment to start in sequence with 5-10 minute delays between each.
Savings potential: 10-30% reduction in peak demand
2. Install a demand controller
These devices monitor real-time demand and automatically shed non-critical loads when you approach your target peak. They can briefly cycle HVAC or delay equipment startups.
Savings potential: 15-25% reduction in peak demand
3. Shift heavy loads to off-peak hours
If your rate has time-of-use demand periods, running heavy equipment during off-peak windows (often nights/weekends) can dramatically reduce demand charges.
Savings potential: 20-40% reduction if TOU rates apply
4. Improve power factor
Many utilities bill demand in kVA (apparent power) rather than kW (real power). A poor power factor means you're billed for more than you're actually using. Capacitor banks can correct this.
Savings potential: 5-15% if power factor is below 0.9
5. Consider battery storage
Battery systems can "shave" peaks by discharging during high-demand periods. Increasingly cost-effective for businesses with significant demand charges.
Savings potential: 20-50% peak shaving with proper sizing
Finding demand charges on your bill
Look for these line items on your commercial electric bill:
- "Demand Charge" or "kW Charge"
- "Capacity Charge" (especially in PJM territory)
- "Distribution Demand"
- "Peak Demand" or "Billing Demand"
Your bill should also show your actual recorded peak demand (in kW or kVA) and the rate per unit. If you can't find it, call your utility—understanding this number is the first step to managing it.
Need help analyzing your demand charges?
Our commercial energy team can review your bills and identify savings opportunities specific to your business.
Get a Free Commercial QuoteFrequently asked questions
What are demand charges on a commercial electric bill?
Demand charges are fees based on the highest amount of power (measured in kW) your business uses during any 15-minute interval in a billing period. They cover the cost of infrastructure needed to deliver power during peak usage moments.
Why do businesses pay demand charges but residences don't?
Commercial facilities have much higher and more variable power needs. The utility must maintain capacity to handle your peak demand even if you only hit it once a month. Demand charges ensure businesses that require more infrastructure capacity pay their fair share.
How can I reduce my demand charges?
Key strategies include: staggering equipment startups, installing demand controllers, using energy storage, shifting heavy loads to off-peak hours, improving power factor, and monitoring real-time demand to avoid spikes.
What percentage of my bill is demand charges?
Typically 30-70% of a commercial electricity bill comes from demand charges, depending on your rate class and load factor. Businesses with "peaky" usage patterns (high peaks, low average) pay proportionally more in demand charges.
Do all commercial electricity rates have demand charges?
Most commercial rates above a certain usage threshold include demand charges. Small commercial accounts (typically under 25-50 kW) may be on rates without demand charges. Your rate class determines the specific structure.