What is a Demand Charge?
Large users of electricity often bear disproportionately high energy costs because they not only pay for the energy they actually use, but they are also required to pay for the right to have energy capacity available to them (whether or not they are using that capacity) at all times. This is called a “demand charge.”
A utility company defines a “demand charge” as a charge that “is determined using the maximum demand (or “peak demand”) occurring during the monthly billing period.” The demand charge is billed as a fixed rate calculated on a per kw (kilowatt) basis. This charge is based on the premise that commercial customers and other large users of electricity who require even brief peaks of power from the grid should pay a share of the infrastructure and maintenance costs associated with the capacity to provide that power when needed. If the customer uses that capacity at any given time during the monthly billing cycle, they are charged for that capacity during the entire billing cycle.
With Power on Demand
|Monthly Demand Charge||$3,625||$2,360|
(demand & consumption)
|Annual Utility Costs||$71,607||$55,284|
Utility regulators across the United States and in other countries are increasingly allowing – and even encouraging – utilities to impose demand charges on large electricity users as a way to reduce peak demand, which is becoming a growing burden on the electric grid. For many commercial customers, demand charges can comprise 30% to 70% of their electric bills. By some estimates, between 10% and 20% of all electricity costs in the U.S. are attributable to peak demand.