Demand Charges Explained — and Why They Drive Up Commercial Bills

How Demand Charges Work

• Demand is measured in kilowatts (kW), not kilowatt-hours (kWh). Your energy charge is based on how much electricity you used over the entire billing period. Your demand charge is based on the single highest average power draw over a short interval — usually 15 minutes — during the same period. A facility that averages 50 kW but peaks at 200 kW will pay more in demand charges than one that runs steady at 100 kW all month.
• Demand charges exist because capacity has to be reserved. The utility must keep enough generation, transmission, and transformer capacity online to handle your highest instantaneous draw, even if you only hit that peak for a few minutes a month. The demand charge is the utility's way of billing you for that reserved capacity — regardless of whether you actually use it consistently.
• Commercial and industrial customers see demand charges routinely. Most small-business and mid-sized commercial accounts are billed under a rate schedule that includes a $/kW demand rate on top of their energy rate. In the United States, this commonly adds $5–$25 per kW of peak demand to the bill, and demand charges can represent 30–70% of the total bill for businesses with brief but intense peaks.
• A single 15-minute spike can dictate the entire bill. Because demand is typically measured as the highest interval draw of the month, one short event — like turning on every oven in a bakery at once, or running HVAC compressors during a hot afternoon — can lock in the demand charge for the whole billing period. Tracking and reshaping these peaks is the single highest-impact lever for cutting commercial electric bills.
• Residential customers usually don't see them — but watch for it. Standard residential tariffs in most states do not include an explicit demand charge. However, some utilities (especially in California and Hawaii) have introduced residential demand-component rates. If your bill lists a $/kW line, you're on a demand-based residential rate and shifting peaks at home could cut your bill.

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