What Are Demand Charges?

Demand charges are one of the largest and most misunderstood components of a commercial electric bill. They can represent 30% to 60% of the total bill, yet many business owners do not know what they are, how they are calculated, or how to reduce them.

How Demand Charges Work

Your electric bill has two main components: energy charges and demand charges. Energy charges measure how much electricity you consumed (kilowatt-hours). Demand charges measure the highest rate at which you consumed it (kilowatts).

Think of it like a water pipe. Energy is the total amount of water that flows through the pipe over the month. Demand is the size of the pipe — the maximum flow rate at any point during the month. The utility has to build and maintain infrastructure capable of delivering your peak demand, even if you only hit that peak for a few minutes.

The 15-Minute Interval

Most utilities measure demand in 15-minute intervals. Your billing demand is the single highest 15-minute average power draw during the entire billing period. One brief spike sets your demand for the entire month.

What Is a Demand Ratchet?

A demand ratchet clause sets a minimum billing demand based on your historical peak. The typical ratchet is 70% to 80% of the highest measured demand in the prior 11 months. This means if your demand peaked at 500 kW last July, your minimum billing demand for the next 11 months is 350 to 400 kW — even if your actual demand drops to 250 kW.

Demand ratchets are one of the most common sources of billing errors. Common mistakes include using the wrong ratchet percentage, applying the wrong lookback period, or failing to release the ratchet after the peak month falls outside the window.

How to Reduce Demand Charges

1. Stagger Equipment Startup

Simultaneous startup of large motors and HVAC systems is the most common cause of demand spikes. Starting each piece of equipment 5 to 10 minutes apart can reduce peak demand by 15% to 30% with zero investment.

2. Shift Discretionary Loads

Move flexible loads like battery charging, water heating, and ice making to times when other equipment is not running at full capacity.

3. Install a Demand Controller

Demand controllers monitor real-time power draw and shed non-critical loads when demand approaches a threshold. Typical cost is $5,000 to $15,000 with a 6 to 18 month payback.

4. Audit the Ratchet

Have a professional auditor verify the ratchet is calculated correctly. A miscalculated ratchet can cost $500 to $2,000 per month.

5. Evaluate Rate Alternatives

Time-of-use rates may charge off-peak demand at a lower rate. If your peak occurs outside the utility's peak window, a TOU rate may save significantly.