Electric Bill Components - Demand Rate

Demand rates or demand charges as they are often called are applied on certain rate schedules, most commonly the large general service or industrial class. These rates are based on the peak demand or highest amount of power in kilowatts the customer used during the billing period. This is done because some customers require rather large amounts of power for short periods of time. This high short term power use requires larger transformers, power lines, and generating capacity to meet these infrequent peak needs. Demand rates were designed to allocate the costs of building and maintaining the electrical system for the peak periods to serve the customers who require that capacity.

There are a number of ways the demand or peak power is determined. The most common method is to measure the highest average power use in kilowatts during a 15 or 30 minute period each month. This peak power or peak demand is multiplied times the unit charge, usually in dollars per kilowatt to determine the demand charge listed on the bill. The demand charge is added to the customer charge, energy charge, and fuel cost adjustment, and any taxes to arrive at the total bill.

Demand rates are also financial incentives for commercial and industrial customers to pay attention to their power use patterns. Some demand rates are based on the highest demand for power measured the previous 12 months, called a ratchet.

Consider this example where the highest peak demand measured on the customer's service in the last 12 months was 350 kilowatts and occurred 8 months ago. If this utility had a demand ratchet, the customer would be billed for the 350 kilowatts worth of peak power usage each following month regardless of the actual demand used as long as it's less than 350 kilowatts. As soon as the customer reaches a new peak demand higher than 350 kilowatts, they are billed for that amount of demand charge for the next 12 months or until they use more and set a new higher peak.