What Are Demand Charges for Commercial Customers?

It’s often a natural career progression within solar sales to begin in residential solar and then progress to working with more commercial customers. The reason being is the sales cycle for commercial clients tends to be much more complex than working with homeowners. There are more decision makers. The additional stakeholders can make the approval process much longer. Last but not least, commercial electric utility rates can vary widely and typically have more complexity than residential rates in the very same utility. 

To support sales professionals newer to the commercial side of the business, HeatSpring instructor Matt McNearney created the short course – Commercial Electric Tariffs: Impacts on Solar– to demystify commercial utility rates. In this short clip from the course, Matt briefly explains one of the key concepts with commercial electric tariffs – demand charges. Tune into the clip or read the transcript below. 

Before going through how demand charges can impact solar, let’s get a little background on what they are and how they work. For most commercial customers, their electric bills are calculated using two factors: kilowatt-hour usage. I mean, well, that makes sense. It’s the amount of electricity consumed over a given month. 

And a demand charge. This is the highest amount of power that a business used at any point during that month.  

As an analogy, if your electric bill was a car trip, the number for demand would be the highest speed that your car reached during the trip, not the total number of miles driven.  

The rationale behind a demand charge is that two companies may use the same amount of electricity, but how they use that electricity can be very different.

Consider this. 

Company 1 and Company 2 use the same amount of kilowatt hours in a particular month. But Company 1’s highest use of power at any one point during that month was 110 kilowatts. Well, Company 2’s highest level was 68. From the utility’s perspective, it had to expend more of its capacity to meet the needs of Company 1 than it did for Company 2, so Company 1’s electric bill should be higher. 

Here’s that annual usage report for XYZ Consultants that we looked at earlier. You can see the report shows both total usage and billed demand for each month.  

Total usage is straightforward. The utility adds up how many kilowatt hours were used each day to get the total for the month. It then adds up how much was used each month and you have the total for the year. 

Demand is different. It is tracked as a single point in time. To truly understand what it is, we need to focus on an individual month, and that means we need to look at a monthly billing statement. 

This is XYZ Consultant’s billing statement for the month of March, and you can see that it’s based on a tariff that includes demand charges. 

The amounts used to calculate the charges for the month are listed in the Billed Usage column. As we just said, kilowatt hours are straightforward. You have meter readings from both the current and the previous month. Take the current number and subtract from the previous one, and you have the amount of usage for that billing cycle. That number is then used to calculate a couple line items on the bill.  

But you can see that demand is used to calculate several other line items, and where exactly does that number come from? To answer that question, let’s start by looking at XYZ’s level of demand for a typical day.  

A little bit about this chart. The bottom axis is time. Utilities often report demand using 15 minute increments, but this chart is in increments of 30, simply because I wanted it to be readable on the screen. It depicts the highest level of power that XYZ used during each 30 minute time frame. The left axis is the amount of demand.

As I said before, it is tracked as a single point in time, so it’s measured in kilowatts (kW), not kilowatt hours(kWh).  

Most of the power is used during normal business hours, and it will fluctuate throughout the day, generally spiking at times when a lot of power is required.

For example, when an air conditioner’s compressor kicks on, you typically get a sudden spike of power before the AC settles down to use a steady stream of electricity. 

To learn more about demand charges and the various types of commercial electric tariffs, enroll today in the Commercial Electric Tariffs: Impacts on Solar course.