How Do Electricity Demand Charges Work?

Electricity bills can be confusing with all the charges involved. The demand charge is a new fee type you may see on your residential energy bill. While seeing a change to the way you’re charged for electricity can be frustrating, understanding how demand charges work can help you save money and optimize energy use. 

Let’s break down demand charges, how they work, and how you can manage them effectively.

What is a Demand Charge?

Demand charges are fees applied based on the maximum power you use at any given point during the billing period. Rather than calculating your electricity consumption based on the hour you use the least energy, it calculates your peak demand or the hour of the month when you use the most power at once.

With demand charges, you will still likely see a high energy bill even if you don’t use that much electricity over a month but use all of your appliances at once during a few hours of the week. It’s because you are being charged based on the most power you use at a given time, and the period the utility company chooses to measure will always be the hour when you use the most energy. 

In other words, your energy retailer won’t calculate this based on the many hours you spend using little to no electricity.

This type of charge discourages residents from minimizing their total electricity use and encourages them to minimize the energy they use at any given time. By spreading out energy use over the course of the month, residents can still find ways to lower their electricity bills.

The Difference Between a Demand Charge vs. Energy Consumption Charge

Understanding the difference between these two charging strategies can help you pinpoint what is driving up the cost of your electricity bill and allow you to optimize your monthly payments.

An energy consumption charge is the total electricity consumed over a billing cycle, measured in kWh. Think of it as the fuel your car uses over a road trip. You’re billed based on the total energy used. You’ll get charged less if you turn off the lights more during one month.

Electric demand charge measures the rate at which you use electricity based on your peak electricity consumption during the billing period and the time of day. It’s like how fast you accelerate your car at any given moment. It asks what time during the month you use the most energy and then at what point during that day. 

You’re then charged based on that calculation. If you turn off the lights more during one month, but you’ve started doing laundry while running the dishwasher and watching TV, you may actually see a rate increase. 

How Do Demand Charges Work?

Demand charges consider the highest power required within a single hour during the billing period. It means your bill isn’t just about how much electricity you use overall but how much you need at once.

This charging strategy shifts the bill’s balance to being driven by peak use rather than total consumption. Instead of turning off lights and unplugging appliances to lower your demand-charged energy bill, you’ll need to find ways to minimize how much power you use at a given point in time. 

By spreading energy use out, this type of charge can work in your favor.

What Are the Key Components of an Energy Bill?

Your energy bill generally consists of several components. Every energy bill can look different, as utility companies employ different charging strategies for their customers. However, if you can understand what each charge on your bill means, you can locate opportunities for savings.

• Transmission and Distribution Charge (T&D): This covers the cost of delivering electricity from power plants to your location. It also keeps the power lines and poles operational so the grid can function correctly.
• Supply Charge: This is the cost of generating the electricity you use.
• Demand Charges: These can be facility-related demand charges or time-related demand charges. Facilities-related ones always apply year-round. They are calculated by the kilowatt based on your highest recorded energy demand of each month’s billing cycle. On the other hand, time-related ones typically only apply during summer months when usage and costs are the highest all year. These charges may also be assessed during mid-peak hours and are separate and in addition to the facilities-related charges. 
• Time of Use Energy Charge: This varies depending on when you use electricity, as rates can differ between peak and off-peak hours. For example, energy may be more expensive to use between 5 and 7 p.m., as many people are cooking dinner, doing laundry, showering, and getting ready for bed.

Just because a charge is on this list doesn’t mean you’ll see it on your electricity bill. Every utility company chooses a different charging strategy. If you have questions about your bill and the charges you see, contact your utility company; they should be able to set things straight.

What Factors Determine the Cost of Electricity?

Several factors impact your electricity costs. Even if your bill is based on demand charges, other components play into the total amount you owe. These things are out of your control, such as global supply chain issues, power plant costs, and fuel costs.

• Demand: Higher use leads to higher prices. If there’s a lower supply available, prices drive up even more. This applies to the time of day, the time of month, and the time of year.
• Fuel Costs: These fluctuate based on market conditions. If an energy provider sources fuel from a country where a war occurs, for example, it can drive the fuel cost up, and those increases are often passed on to the customer.
• Power Plant Costs: Maintenance and operational costs of power plants. It may also include the cost for workers to run the plants and the salaries of linemen who work quickly to resolve power issues.
• Distribution Costs: The cost of delivering electricity to your home or business. If you live in a remote area, the distribution costs may be higher than those in an urban area.
• Charging Strategy: How your utility company charges you for your electricity usage. Volumetric charging is a more common approach for residential homes, but demand charging is also becoming more popular for residents and larger industrial customers.
• Other Factors: Weather, regulations, and supply chain issues can also affect costs. If a storm destroys vital electrical equipment, the cost of repairing it and getting the grid back up and running may trickle down to the customer.

How Are Electric Demand Charges Calculated?

To calculate your demand charges, multiply the kilowatts (kW) of demand by the dollar rate per kW. This gives you your monthly demand charge in dollars.

kW of demand x dollars/kW = monthly demand charge in $

For example, the energy rate uses demand charges of $10 per kW. Your peak use for a given month is 400kW. Given these figures, here’s how you could calculate the demand charge:

400 kW x $10/kW = $4,000

How Will Demand Charge Rates Impact You as a Solar Customer?

Running your home on EcoFlow Solar Generators, such as the EcoFlow DELTA 2 Series Generators, should save you money, but demand charge rates can hinder your savings as a solar customer. These charges will still affect you if you’re attached to the grid, even if you have solar panels.

EcoFlow Rigid Solar Panels can reduce your overall electricity consumption, making a big difference if you’re charged via volumetric billing. However, they won’t help much with demand charges if your peak energy consumption doesn’t align with your solar array’s peak output. 

For example, if you’re using the EcoFlow 400W Rigid Solar Panel, but your peak usage is 10kW, there’s still a ton of wattage that your solar panels can’t provide. The rest of that energy will be drawn from the grid, and you’ll pay based on your hour of highest energy use.

How Can You Benefit From a Demand Charge Rate?

The best way to benefit from demand charge rates is to efficiently manage your energy use. Use the same amount of electricity throughout the month, but avoid using too much power simultaneously. 

For example, shift power-intensive tasks like running the dishwasher or doing laundry to off-peak hours, such as at night. By understanding the system, you can use it to your advantage.

How Can You Reduce Demand Charges in Electricity?

Here are some practical tips to help you reduce demand charges:

1. Determine What Causes Demand Increases: Identify which appliances or activities spike your electricity use. Other factors, such as hot weather or a larger overall demand from the grid’s customers, may play a role. If you can target the driver of the demand increase, you can find ways to decrease it.
2. Calculate Financial Impact: Understand how these charges affect your total household or operational costs. You might have to estimate this unless you have a monitoring system that will allow you to simulate energy demand in different situations. One option would be to track your usage when connected to a solar generator such as the EcoFlow DELTA Pro + 400W Solar Panel using your EcoFlow App. That way, you’re not pulling from the grid while you test and adjust your usage.
3. Reduce Peak Usage: Lower your highest peak during the month or prevent your demand from exceeding a specific limit rather than trying to lower overall usage.

Frequently Asked Questions

Final Thoughts

Understanding electricity demand charges can significantly impact your energy management and cost savings. While this charging strategy is new to many residents and can be frustrating, knowing how these charges work and implementing strategies to reduce your peak usage can empower you to optimize your electricity usage and save money. 

By staggering your appliance use, using an EcoFlow Solar Generator to offload some of your demand from the grid, and minimizing use at a given time, you can see positive changes in your energy bill.