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Monday, 09 March 2015 10:03

Demand Charges (mostly) de-mystified

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Not too many Accounts Payable people review their electric bill in detail.  Generally, the bills are so detailed that they’re confusing – maybe that’s the intention of the utility.  There are 6-10 different line item charges, and for most of us the description is close to unintelligible.  That probably won’t change anytime soon.



We would like to explain at the “30,000 foot level” a very significant aspect of many commercial building electric bills because it matters a lot for those it affects.

The lion’s share of your bill is calculated based on one of the two things; energy use and electrical demand.  Energy is pretty straightforward; the more you run a motor or the longer you keep the lights on, the more you pay.  For most of us, it’s a straight proportion – use twice as much electricity and pay twice as much for the privilege.  Pretty simple!


Demand charges are driven by a different principle that is directly affected by your peak usage (i.e., peak demand for electricity).  Some buildings use energy in a pretty steady manner.  Imagine a warehouse that is not air-conditioned; most of the electricity is used for lights and the lights operate the same hours every day.  If you graphed the daily electricity usage, it would look like a flat line.  The power company knows exactly what to expect; if all of their customers were similar warehouses, they would know precisely how many generators to run every day and would never build more than they needed.  This is one reason why solar panels can be a big win; the sun shines during the daylight hours when demand charges are in effect – and offloads some of the peak power demands. (Cloudy days can be a problem, however.)

For most buildings, however, the electricity usage varies quite a bit.  In many climates, especially when cooling is provided by electricity (and heating by natural gas), the electricity spikes dramatically on the hot summer days when the air conditioning is working at peak capacity.  What’s a power company to do?  They actually have to build a “peaking” power plant for billions of dollars and then let it sit idle 10 or 11 months each year.  That’s a tough amortization problem!

Their solution to help pay for that costly peak power is to charge separately for your peak use in kilowatts (kW).  You probably need that short duration peak capacity, but they need to get paid for it, too.  Because the peak power demand is not a big concern in the early morning or late evening, demand charges often are not in force at those times.

It is what it is.  On the other hand, if you can control it, there are BIG savings opportunities. Here are examples:

  • Run a power hungry process on the third shift (only).  Energy charges remain the same, but demand charges go away completely because the demand occurs outside the monitoring window.
  • Replace an over-sized pump or fan motor with the proper size (believe us, you have some of these) and the demand charges reduce proportionately.  The same can be true for installing a variable speed drive.
  • Replace HID lighting with fluorescent or LED lamps and see three benefits: lighting improves, energy charges reduce and demand charges also reduce.

Here’s a simple, but dramatic example of how it works:

A wood finishing shop has a dust collector that is pretty large, about 300kW.  Their shop runs 50 hours / week and 50 weeks / year.  Over the course of a year, they spend:

300kW x 50hrs/wk x 50wks/yr x $0.07 / kWh = $52,500 (This is the annual energy cost)


300kW x $8.20 / kW x 12 months                      = $29,500 (This is the annual demand cost)

Demand charges, in this case, are more than a third of the total. Ignore them at your peril.  What if this dust collector was purchased without careful sizing and was over-sized by 40%? Reducing capacity to the proper value would result in energy savings of $21,000 each and every year, but the actual savings consider demand charges and are $30,000 every year.  Ignoring the demand charge would mean a complete miscalculation of ROI.

Demand is a major component of energy cost and must be considered properly to understand true savings from energy-based projects.  It can be a thorny issue, but has an element of opportunity that smells like a rose.

Read 2882 times Last modified on Monday, 09 March 2015 10:43

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