Is a Demand-Based Electricity Rate Right for You?
If you manage a commercial or institutional building, you may have seen “demand charges” on your electricity bill and wondered what they are—or whether they’re fair. Here’s a quick breakdown.
Why Do Utilities Use Demand Charges?
Like any business, electric utilities have both fixed costs (like poles, wires, and generators) and variable costs (like fuel and maintenance). For larger customers, utility bills are often split into:
Energy charges (based on kWh) – to recover variable costs
Demand charges (based on peak kW or kVA) – to recover fixed costs
This split helps ensure that customers who place a bigger strain on the system contribute fairly to the infrastructure needed to support them.
How Is Demand Measured?
Your peak billing demand is typically the highest amount of power you draw in any 15-minute window during a billing cycle. Even a short spike in usage can set your demand for the month.
For example, running a standby chiller for testing while the lead chiller is operating near full load can create a costly peak.
Are Demand Charges Just a Cash Grab?
No—this is standard utility practice. Assuming rates are set fairly, demand billing helps distribute fixed system costs across customers in proportion to how heavily they use it.
Small users like homes usually don’t see demand charges because their usage is predictable and easier to blend into flat energy rates.
Is It Right for You?
If you have a choice between demand-based and flat rates, which rate is best for you depends on your usage pattern. If your building uses energy steadily throughout the day, demand-based billing may cost less than a flat rate. But if your usage is “spiky,” it might cost more.
If you have a smart meter (most do), it’s possible to compare your bills on a total $/kWh basis—including demand charges—to see which rate structure works better for your building.
Not Sure? We Can Help.
If you’re uncertain whether you’re on the right electricity rate—GRCL can help you figure it out. Because if you’re not managing your energy, who is?
2-Minute Payback is GRCL’s weekly blog of energy-saving tips and tools for busy building managers. This post was written by Chuck Faulkner.
