Demand Charges Explained: What They Are and Who Pays Them

EIA defines a demand charge as the part of a consumer's bill based on the consumer's maximum electric capacity usage, calculated from the billing demand under the applicable rate schedule.

The difference between kW and kWh matters here. A kW is a rate, like speed. A kWh is an amount, like distance. Two homes can use the same kWh in a month and have very different peaks. A demand charge prices the peak. Use the watts to kWh calculator to see how the two relate.

Say a plan charges $12 per kW of peak demand each month, plus an energy charge. Two homes each use 800 kWh. The first never draws more than 5 kW. The second runs an oven, a dryer and the air conditioner at once and reaches 10 kW.

The two bills have the same energy charge. The demand charge differs by $60 a month because of when the loads ran. The rate and the peaks here are invented to show the method.

Demand charges are standard for commercial and industrial customers. Most households pay only for kWh, plus a fixed monthly charge. A few utilities offer optional residential demand rates, and some require them for certain customers. If you have one, your bill will show a charge in kW or a line called demand or billing demand.

EIA says it does not collect or publish rates, tariffs or demand charges. Your utility's rate schedule has the exact terms, including the time window used to measure the peak and the price per kW.

Much of the cost of the grid depends on the highest load it must serve, not on total energy. Wires, transformers and power plants have to be big enough for the peak. A demand charge ties part of what you pay to the peak you cause. Supporters say that is fairer. Critics say it is hard for households to understand and to control, which is why it is rare for homes.

• Do not start several large loads at once. Run the dryer and the oven at different times.
• Schedule electric vehicle charging for hours when little else is running.
• Use a thermostat schedule that cools or heats a little earlier, so the system does not run flat out at one time.
• For equipment with large motors, ask an electrician about soft starters, which reduce the surge on startup.
• Ask your utility how the peak is measured. A 15 minute window punishes short spikes. A longer window forgives them.

A meter that records usage in short intervals, often 15 minutes, can find your highest interval. Smart meters do this automatically. The billed demand is typically the highest interval in the billing period, and some tariffs use a longer lookback that carries a high peak into later bills. Ask your utility which method applies, because it changes how much a single spike costs you.

As more homes add electric vehicle chargers, heat pumps and electric water heaters, peak load matters more to utilities. That is one reason some offer optional residential plans with a demand component. If your utility proposes one, ask for a bill comparison using your own past usage before you switch, and see time-of-use rates explained for a related way of pricing the hours of the day.

• Is the plan optional, and can I return to my old plan?
• How long is the interval used to measure my peak?
• Does a high peak carry into later months?
• Can you show me what my last twelve months would have cost on this plan?

• EIA glossary: Demand charge
• EIA FAQ: Does EIA publish electric utility rate, tariff and demand-charge data?