How Demand Charges Are Sabotaging Your Electricity Bill… And What You Can Do About It

by Andrew Meyer
November 17, 2015

It’s time to get up close and personal with your energy bill.

Electricity on Demand

If you’ve never taken a good look at your electricity charges, you may not have noticed that electricity is often metered and billed in two separate ways by utility companies. Actually, your bill may not even reflect this, since many companies combine the charge. But it’s true. You are billed according to both your consumption each month, and also by your demand for electricity during that specific billing cycle. Your demand is based on the highest power capacity you required during the past month (probably a fifteen-minute interval within the time period.)

Not all power companies impose demand charges on their customers, but the trend is growing quickly, especially in densely populated areas. The demand for electricity continues to grow, while grid technology remains essentially unchanged since the 70’s. The grid, as it stands, was not built to sustain the energy needs of households filled with the latest, greatest technologies, so many power companies are forced to look for additional revenue sources. Naturally, companies are looking to us, the customers. The more electricity you ask for, the more additional charges and fees power providers will dish your way. Brace yourselves, because the price hikes are likely to continue… for a long, long time.

To Understand Demand Charges, Think In Terms of Sushi Cravings

Let’s think of it in terms of sushi. Let’s say you’re a big sushi-eater, but you’re usually in no hurry. You order six rolls, but give the chef plenty of time to make them, and bring them out to you one-at-a-time as he is able to complete them on his own. Your consumption is steady, but your demand is low. Then one day, things are different. You still want your standard six rolls, but you want them immediately, to-go. In order to make this happen, your sushi joint is going to need more chefs, more knives, and more workspace. The amount of fish is the same, but your demand is high, and it’s going to cost you extra to cover the overhead of more staff and equipment. That’s your demand charge.

Power companies work similarly. They have a certain capacity for providing electricity to their customers, and if the demand for electricity was slow and steady, like the casual, patient sushi-eater, they could handle the demand (at this point, at least). But that’s not how electricity customers work. Most people aren’t using a lot of electricity during the day, but really ramp up their demand around 5:30 pm, when they’re ready to make dinner, do laundry, recharge their devices, and maybe relax with a bit of entertainment. When a huge group of people (think an entire timezone) demands a lot of electricity, all at once, the power grid’s resources get maxed out, requiring maintenance and expanded capacity. Who’s going to pay for that? Power companies say that’s on you.

Who Foots The Bill?

Even today, in the midst of incredible advances in home batteries and other energy storage technologies, the energy grid doesn’t regularly store power. This means supply gets complicated for customers who have a high demand for electricity, especially in spurts. This requires expensive equipment like transformers, wires, substations, and generators to meet the demand. Demand charges help cover this cost. In some areas, all customers are charged for demand. But ideally, higher-demand customers, the ones that necessitate the expensive equipment, foot the majority of the bill.

This is where demand charges come in. Power companies up the prices during peak-demand hours, so customers using the most electricity when it’s in highest demand are hit the hardest. Unfortunately, all customers have to pay higher rates during the hours of highest demand, even if they’re using far less power than others. Their rate per kWh will be similarly high. Electricity rates in general, regardless of the time of use, are rising around the country, to try to support grid maintenance.

In some states of the US, like California, electricity rates are really taking a jump. To raise additional revenue, power companies are no longer offering the same perks to customers who are generating their own energy. Californian households with rooftop solar used to be able to sell excess energy back to the grid at retail rates. It looks like this will no longer be the case, and selling back energy won’t be quite as lucrative as it once was. The best way to get the most value out of the energy generated from solar is to keep it, and use it yourself. This is motivating many customers with solar energy to keep the energy they are generating, and storing it in home batteries.

Home battery owners can stay connected to the grid, but others are choosing to go off the grid entirely. Energy storage makes off grid living a more viable option than ever, providing power to households even during the hours that the sun isn’t shining. The best part? After the installation of solar photovoltaics and energy storage, your energy is essentially free.

The only way to truly break free of the rising rates is to cut ties and get off the grid, storing renewable energy like solar power in a residential home battery.

Calculating Costs

How are separate rates calculated during different times of use?

Consumption is measured at a rate based on kilowatt hours, or kWh. Demand is measured in kilowatts, or kW. When your demand is higher, and you need more kilowatts at a higher intensity for a short period of time, your demand charges are higher. If you used the same amount of kilowatt hours over a longer period of time, at a lower intensity, you would pay a lower rate, even if your overall consumption was the same. If you still have sushi on your mind, think paying a tip to get your order quickly, to go, when you could show up before the lunch rush and sit, enjoying the same food for a lower price.

This change in rate can be considerable. Depending on your rate structure, demand charges can compose up to 30% of your bill. Power companies are looking to deter customers from using power during peak demand hours to ease the pressure on the grid, but many grid-connected customers are not aware of the steep additional charges they’re paying. It is likely that your power company does not break down this information in your bill, but simply combines the rates into one overall charge. You may be frustrated, but you’re not powerless. Keep reading to learn ways you can help take control of your energy.

What Can You Do About It?

There are a number of things you can do to reduce your demand charges.

  1. Get personal with your energy usage. Take a look at your consumption and demand of energy, taking note of your peak usage times. See if you can take steps to lower your peaks, and lower your energy use altogether. Consider adjustments to your energy efficiency, even to the point of getting rid of high-intensity equipment, or only turning on one major appliance at a time. You may end up using more kWh (kilowatt hours), but your demand charges will be lower, resulting in a less costly bill.

  2. Look closely at your energy bill. Some companies charge different prices for energy, depending on when you’re using your energy, in addition to how high your demand is. For example, if most of the people in your area turn on their dishwashers, clothes dryers, and entertainment systems at 7PM creating a high demand for electricity, the cost per kW is going to be higher than it would be in the middle of the day, when most people are out of the house. Try to lower your usage during these high-demand hours. (Note: Most companies report peak demand times at the 5:30 pm hour.)

  3. Consider storing energy. With a home battery, you can store energy during low-demand hours, and use it during times of higher-demand without paying an extra cost. Storage can also regulate your energy demand by eliminating your demand peaks, and thus cutting demand charges. Even if you don’t generate your own energy (with solar panels, for example), storing energy with a home battery can save you a considerable amount of cash.

By simply understanding your bill, evaluating your usage, and regulating your consumption of energy, you will see a considerable drop in your energy charges. To maximize your savings, consider investing in a home battery. Then, treat yourself to some sushi.