What is the Demand Charge on my bill?

Feb 18, 2025

As a commercial customer, you may have noticed a demand charge on your recent electric bill and wondered what it is, why you’re being charged, and how it works. Understanding demand charges can help you manage your energy usage more effectively and even reduce your overall bill.

What is a Demand Charge?

A demand charge is based on the highest amount of power (in kilowatts) that your business requires at any single point during a billing period. It’s typically calculated using the highest demand measured over a one-hour or 15-minute period within a month. This means the charge isn’t about how much energy you use overall—it’s about how much you need at once.

For example, if your equipment all runs simultaneously during one part of the day, your demand for power spikes, which sets your demand charge for the month.

How Does Demand Charge Work?

Unlike a standard residential electric bill, which is based purely on the total amount of electricity you consume over a month, a demand charge focuses on your peak demand—the maximum power you need at one time. The demand charge portion of your bill is calculated based on this peak, while the rest of your usage is billed at a lower volumetric rate.

So, reducing your overall consumption won’t always lower your bill significantly. The key to reducing your bill when demand charges are applied is spreading out your energy use to avoid high peaks.

Why Does the Light Department Charge for Demand?

Demand charges help utilities cover the cost of maintaining enough generation and distribution capacity to meet the highest possible demand. Power providers must ensure they have enough infrastructure to meet peak demand at all times, even if it only happens occasionally.

Here’s why it matters:

Fair cost distribution: Demand charges ensure customers with higher peak usage pay for the extra capacity required to serve them.

Efficient system planning: Utilities use peak demand to properly size electric service and ensure there’s enough capacity for everyone.

Lower energy rates: Since demand charges shift some of the costs from energy consumption to peak demand, the per-kilowatt-hour (kWh) rate for consumption is generally lower for commercial customers.

How to Manage and Reduce Demand Charges

The only way to reduce your demand charge is to limit how much power you require at any one time. Here are a few strategies:

Stagger equipment use: Avoid running high-energy equipment all at once.

Install energy management systems: Use smart systems to monitor and control demand.

Shift operations: If possible, shift high-energy processes to off-peak times.

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