An Overview of Demand Charges: What are They and How Can You Reduce Yours?

Take a close look at the most recent utility bill for your commercial business. Like most other customers in your category, you’re likely shelling out thousands of dollars to keep the power running. Yet, do you know what charges comprise that total? More importantly, do you know what steps you can take to lower your monthly payments?

It’s likely that a large portion of your bill is attributed to what’s known as demand charges. The more you understand them, and the reasons why they’re tacked onto the statement, the more proactive you can be about lowering them.

Today, we’re breaking down the logistics behind demand charges and shedding light on how you can adjust them to work in your favor. Ready to get started? Let’s crunch some numbers.

What are Demand Charges?

There are two primary charges on your commercial utility bill. They are your energy charge and your demand charge.

Let’s start with the simplest number to calculate — your energy charge. This is measured by taking the number of kilowatt hours, or kWh, your building used that month and multiplying it by the predetermined rate your business pays for utilities.

Then there are demand charges. In short, utility providers calculate this by looking at the highest level of power you need during a particular demand interval. These intervals are normally measured in 15-minute timespans. So, your demand meter is taking a “snapshot” of your business requirements every 15 minutes within a billing cycle, determining where your usage peaks, and measuring from there.

Then they’ll multiply that power requirement, measured in kilowatts, by an established demand rate. Say, for instance, your peak interval use is 75 kW. If your demand rate is $10 per kW, then your demand charges will equal $750. This number is included on your bill in addition to the basic energy charge.

The Reasoning Behind These Charges

The crux of a utility company is to keep your home or business supplied with all the power it could possibly require. To this end, they’re interested in making sure your building always has access to the maximum amount of electricity it needs. Thus, even if you only reached that 75 kW level one time in the past billing cycle, there’s a chance it could occur multiple times the next month, so these charges are factored in to account for that use.

Moreover, demand charges also help to cover the expensive equipment that utility providers rely upon to ensure they’re not only able to keep your lights on, but those of your neighbors as well. To make sure there is never a power deficit, these companies all rely on standby machines including generating stations, transformers and more. These systems are powerful and essential. They’re also expensive, and demand charges can help control those costs.

How Can I Lower My Demand Charges?

Of course, the first way to bring these charges down is to better manage your organizational energy use. If you can reduce your peak demand amount, you’ll automatically help control those costs.

This might require replacing outdated legacy equipment with newer, more energy-efficient models. Or, you might find that you can scale some systems back to smaller versions to reduce your energy footprint. At the same time, you may also consider scheduling the activities that require the most energy for times of the day with lower loads. That way, your usage will be more even and there will be fewer spikes.

Another route to take is to invest in a commercial solar energy system. This system can harness the sun to generate electricity, which can be accessed during peak hours. As a result, you’ll rely less on the grid. Yet, though this can be a valuable alternative, remember that utility power usage may spike if there’s a single cloudy day and your solar system can’t perform. This one-time uptick can result in a demand charge equivalent to one you’d see without panels on your roof.

This is where solar storage can help, allowing you to store and access saved energy reserves in the event of adverse weather conditions. You can store excess solar energy in batteries for future use.

Understanding and Managing Demand Charges Moving Forward

Before moving forward, speak with your utility provider to get a clearer view of what you’re paying every month in demand charges. Then, take steps to reduce your spikes in energy use. From using your power more efficiently to investing in renewable energy solutions, you have options.

Need help understanding and managing your utility bills? That’s where we come in.

We’ve partnered with a leading utility management company to help you pay and process your bills on time and ensure reporting data is accurate. Learn more about this service we offer, and allow us to take the guesswork out of the equation.