Demystifying Demand Charges: Understanding and Managing Your Electricity Costs

At a Glance

In this blog post, we unravel the complexities of demand charges, a significant factor that impacts commercial electricity costs. We delve into the concept of demand charges, distinguishing it from energy charges and exploring how it is measured and calculated. Furthermore, we discuss innovative opportunities for managing demand charges for your business, introducing technologies such as the Exro Cell Driver™ - a turnkey solution for commercial and industrial demand charge management. By reducing peak demand and embracing sustainable energy practices, readers discover the benefits of lowering demand charges, not only for their finances but also for the planet.

Table of contents:

Understanding your electricity bill can be difficult due to the multiple factors involved in determining the fees. One of the most significant, yet often misunderstood is the demand charge. Many businesses might focus primarily on energy consumption charges, while demand charges can represent 30-70% of commercial electricity bills. This overlooked part of energy costs can have a significant financial impact on businesses that use a lot of energy, especially if not managed properly. Demand charges are introduced by electricity distributors to incentivize consumers to reduce usage during peak hours, for generation and distribution capacities to withstand the grid’s energy demand. Not only do demand charges already represent a significant portion of commercial electricity bills, the costs of delivering energy are expected to continue rising to recover costs from aging grid infrastructure and decreased overall costs of energy production from widespread adoption of renewables. According to a 2015 report highlighting PG&E, demand charges in the US increased roughly 30% in the 3 years leading to the report and 75% over the previous decade.

What are Demand Charges?

Demand charges refer to fees imposed by utility providers based on the highest rate of energy consumption during peak periods. Unlike energy charges that are determined by total energy usage over a billing cycle, demand charges focus on the intensity of power required at a specific moment. Demand charges are calculated based on the peak kW usage in a billing period that occurs over a specific time interval. During this period of high electricity demand, commercial and industrial businesses that operate energy-intensive machinery are often charged additional fees known as demand charges. These fees are introduced by the utility provider to cover the costs of operating a higher grid capacity, to meet the instantaneous energy requirements. Essentially, they reflect the capacity needed to meet a consumer's peak demand for commercial electricity.

Differentiating Demand Charges from Energy Consumption Charges

Line graph shows energy demand line throughout the day with area under the line representing overall energy consumption and peak demand noting highest point of kW consumption

Differentiating demand charges from energy charges is key to comprehending the nuances of commercial electricity billing. While energy charges are based on the total amount of energy consumed over a billing period (measured in kilowatt-hours, or kWh), demand charges focus on the intensity of power required during peak demand moments (measured in kilowatt, or kW).

How Demand Charges are Measured & Calculated

Demand charges are measured by tracking the highest rate of electricity consumption over a specific interval, often referred to as the demand interval. This interval can range from 15 minutes to an hour, depending on the utility provider and the billing structure. The demand is typically measured using specialized meters that record and store data on peak power usage.

Calculating demand charges involves multiplying the peak demand recorded during the demand interval by the applicable demand charge rate set by the utility provider based on the current time or season. The demand charge rate is typically expressed as a cost per kilowatt (kW) of peak demand. The resulting amount is then added to the energy charges along with any other billing charges such as Non-Bypassable Charges (NBCs) to determine the total electricity cost for a billing period.

Line graph shows two different buildings' load profiles throughout the day. Both buildings share the same peak demand, resulting in identical demand charges despite sizeable difference in overall energy consumption.

Examples of Common Demand Charge Structures

All demand charge pricing models share the purpose of influencing consumer behaviour and promote efficient energy usage. The most common method for calculating demand charges is by using a flat demand rate expressed in dollars per kilowatt ($/kW) based on the consumer’s highest recorded demand in any given 15-minute interval within a billing cycle, however some other common methods for structuring demand charges include:

Time-of-Use (TOU) Pricing: TOU pricing divides the day into different time periods, typically peak, off-peak, and super off-peak periods. Each period has its own predetermined pricing rate for energy consumption. Customers are charged based on the time of day they consume electricity, encouraging them to shift their usage to off-peak hours when the rates are lower. The objective is to incentivize customers to align their energy usage with periods of lower demand and reduce strain on the grid during peak times.

Seasonal Pricing: Seasonal pricing involves varying demand charge rates based on the time of year or specific seasons. Higher demand charges may be applied during peak seasons when energy usage is typically higher, such as summer or winter. The rates may be adjusted seasonally to reflect changes in energy demand patterns, weather conditions, or other factors specific to different seasons.

Coincident Peak Pricing: Coincident peak pricing refers to demand charges that are based on the customer's highest recorded demand during the utility's system-wide peak demand period. The charges are applied when the customer's peak demand coincides with the overall peak demand on the grid. This pricing model incentivizes customers to manage their demand during the specific time when the grid experiences its highest overall demand.

Ratcheted Pricing: Ratcheted pricing sets the demand charge based on the customer's peak demand during a defined historical period, often a year. The demand charge remains at the highest level recorded during that period, regardless of subsequent usage patterns. This structure encourages customers to manage their peak demand and avoid exceeding previously established levels to avoid higher charges.

Block Demand/Tiering Pricing: Block demand or tiering pricing involves dividing the customer's demand into different blocks or tiers and applying different demand charge rates to each block. Each block represents a specific range of demand, and the corresponding rate is applied only to the demand falling within that block. Typically, the demand charge rate increases as the customer's demand exceeds certain thresholds. This pricing structure encourages customers to manage their demand within each block and potentially reduce their consumption to avoid moving into higher-cost blocks.

Averaging Interval Pricing: Averaging interval pricing calculates the demand charge based on the average demand over specific time intervals. Instead of focusing solely on the peak demand, it considers the average demand within the defined intervals. This structure encourages customers to maintain a more consistent and manageable demand profile throughout the intervals.

While many demand charge pricing models share close resemblances, the availability and specifics of these demand charge pricing structures can vary significantly depending on the utility provider and a region’s regulatory policies. Additionally, some utilities may offer customized or unique demand charge pricing structures, combining various components from different models to cater to specific customer segments or industries.

Regulatory Aspects & Policies Affecting Demand Charges

Demand charges are influenced by various regulatory aspects that shape the commercial electricity industry. Understanding these key regulatory factors is essential for businesses and consumers navigating the landscape of demand charges. Some of the key regulatory aspects affecting demand charges include:

Rate Structures: Regulatory bodies play a role in defining the rate structures that govern demand charges. They establish guidelines and frameworks for how demand charges are calculated, ensuring transparency and fairness in billing practices.

Utility Regulations: Utility regulations set guidelines for utility providers regarding demand charge calculations, rate design, and billing methodologies. These regulations aim to balance the interests of both consumers and utility providers, ensuring reliable and affordable electricity service.

Net Metering Policies: Net metering policies enable consumers with renewable energy systems to feed excess energy back into the grid. These policies can affect demand charges by allowing consumers to offset their peak demand with surplus energy generated on-site, potentially reducing their overall demand charges.

Demand Response Programs: Regulatory aspects influence the design and implementation of demand response programs. These programs encourage businesses and consumers to reduce their electricity usage during peak demand periods, often through financial incentives. Regulatory bodies define the rules and mechanisms for participating in demand response programs, impacting how businesses and consumers can manage their demand charges. These programs provide benefits such as reduced demand charges, potential cost savings, and improved grid reliability by alleviating stress during peak demand periods.

As the adoption of electric mobility expands, the increasing utilization of Direct Current Fast Charging (DCFC) stations has led to significant surges in demand charges. While a select number of Electric Service Providers (ESPs) have begun offering pilot EV charging-specific subscriptions to mitigate demand costs for users, the necessity for energy storage systems such as the Exro Cell Driver™ remains apparent. These systems are particularly beneficial for managing peak demand in areas like British Columbia, a region that is at the forefront of EV adoption in the country. According to Suncor, demand charges incurred from running EV DCFC stations make up more than 80% of primary utility costs for BC Hydro customers.

Impact of Demand Charges on Electricity Bill

Demand charges can have significant cost implications, especially for commercial and industrial businesses who experience variable demand profiles or operations. Since demand charges are based on peak power usage, even a short period of high demand can result in substantial charges. For businesses that rely on energy-intensive operations, such as manufacturing facilities, restaurants, or shopping malls, demand charges can make up a significant portion of their commercial electricity bills, in turn reducing business profits. In the long run, power disruptions due to failures in the grid’s ability to supply electricity during peak demand often result in further inefficiencies, thus leading to increased demand charges for consumers to make up for these losses, highlighting the importance of managing demand charges today.

It is important to note that reducing energy usage alone may not necessarily result in a proportional reduction in demand charges. Managing peak demand and optimizing energy usage during critical periods are essential for effectively minimizing demand charges.

Strategies & Technologies for Demand Charge Management

Peak Shaving & Load Shifting

Peak Shaving with BESS: Battery charging period happens during off-peak periods when cost of energy is low and battery discharging period happens during peak demand times when energy cost is high.

Peak shaving is a demand charge management strategy that involves reducing electricity consumption during peak periods when demand charges are in effect. This approach involves deploying energy storage systems to store excess electricity during periods of low demand and then discharging it during periods of high demand.

Load Shifting with BESS: Energy usage is redistributed from periods of high demand to periods of low demand.

Load shifting also known as demand shifting, involves the redistribution of electricity consumption patterns by shifting the timing of energy usage from periods of high demand to periods of low demand. Battery Energy Storage Systems (BESS) are commonly used to implement load shifting strategies to reduce demand charges by charging during off-peak hours and discharging during peak hours to smooth out demand spikes.

While both peak shaving and load shifting strategies aim to reduce demand charges, peak shaving is often achieved as a result of load shifting by smoothing out the power demand curve with the help of a BESS like the Exro Cell Driver™, which can charge during off-peak hours and discharge energy during high demand periods when electricity is costly.

On-Site Renewable Energy Generation

On-site renewable energy generation, such as hosting solar panels is another demand charge management tactic done by generating power during periods where peak demand and peak solar radiation overlap. Additionally, by pairing renewables with BESS, commercial and industrial businesses can further reduce their reliance on grid power, improve sustainability, and lower demand charges.

Energy Efficiency Improvements - Identifying Opportunities and Implementing Changes

Improving energy efficiency is a crucial strategy for managing demand charges. Identifying opportunities for energy efficiency improvements involves conducting energy audits, analyzing energy usage patterns, and identifying areas where energy waste can be reduced. Implementing changes such as upgrading to energy-efficient equipment, improving insulation, optimizing HVAC systems, and adopting smart energy management practices can lead to significant reductions in both energy usage and demand charges.

Utility providers often consider power factor in determining demand charges because low power factors require additional investment in infrastructure to compensate for inefficiencies. Power factor is a measure of electrical efficiency and represents the ratio of real power to apparent power in an electrical system. Improving power factor through power factor correction measures can help minimize demand charges and improve overall energy efficiency. Power factor correction is often achieved using capacitors or inductors to offset reactive power of an AC circuit system to enhance unit efficiency. However, these traditional methods are sometimes insufficient or inflexible, especially in systems with rapidly changing loads.

BESS can help increase advanced and dynamic power factor correction by acting as a source of both real and reactive power, meaning they can adjust the power factor more quickly and accurately than traditional methods. This allows for improved power quality and more efficient use of power lines and other infrastructure, in turn reducing demand charges for consumers.

Battery Energy Storage Systems (BESS)

Graph displays minimized demand peaks by using BESS to avoid costly demand charges

BESS offer businesses the solution for demand charge management by allowing increased control over their energy consumption through tactics like peak shaving and load shifting. When electricity demand is high, such as during times of extreme weather or when commercial and industrial facilities operate at maximum capacity, utility providers often struggle to meet the demand. By deploying a BESS in such situations, consumers can store electricity during low demand periods and discharge during high demand periods. This reduces the instantaneous power demand from the utility company, effectively lowering the aggregate peak demand level. As a result, consumers can avoid or minimize the high demand charges associated with their peak power consumption. According to a recent industry analysis, commercial energy storage tends to be most economically advantageous when demand charges reach or exceed $15/kW.

Additionally, battery energy storage systems can provide other grid services, such as frequency regulation and voltage support, which can further enhance grid stability and efficiency.

How the Exro Cell Driver­™ Addresses Demand Charges

Designed to optimize battery performance and extend battery life, the Cell Driver™ is a fully integrated and stand-alone commercial energy storage system. The Cell Driver™ plays a crucial role in minimizing peak demand and reducing associated demand charges. By leveraging advanced control algorithms and real-time monitoring, the Cell Driver™ intelligently manages the flow of energy within the local energy systems. It dynamically adjusts the power output of each cell, allowing for a more balanced distribution of energy and mitigating the risk of peak demand spikes. This optimization not only helps businesses avoid excessive demand charges but also ensures efficient utilization of battery capacity.

With the Exro Cell Driver™, businesses gain a powerful tool to actively manage and mitigate demand charges. By optimizing battery performance, enabling peak shaving, and intelligently adapting to pricing structures, the Cell Driver™ empowers businesses to optimize their energy usage, reduce peak demand, and effectively manage their demand charges, resulting in considerable cost savings.

Exro Technologies is firmly committed to leading the global transition towards a future where energy is optimized, controlled, and sustainable while reducing demand charges. As a pioneering company in advanced power electronics and control systems, Exro strives to revolutionize the way energy is utilized by optimizing its delivery and maximizing efficiency across various segments. Exro's dedication to advancing clean energy solutions and maximizing efficiency is driving positive change and shaping a more sustainable and economically viable energy landscape.

Contact us to learn more about how Exro can help you manage your demand charges.

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