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Understanding Demand

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How Demand Charges are Computed and Billed

As you have just learned, electric power use is metered in two ways: on maximum kilowatt use during a given time period (i.e., kW demand typically measured in 15-minute or 30-minute intervals) and on total cumulative consumption in kilowatt hours (kWh). A customer's electric rate is set using a complex process of tracking cost of services and often seeking regulatory approvals. The general theory is that demand charges reflect the utilities' fixed costs of providing a given level of power availability to the customer, and energy charges reflect the variable portion of those costs as the customer actually uses that power availability.

Power companies often use a meter that records the power use during either a 15- or 30-minute time window. The average power used during that window is used to calculate the kW demand. The peak demand used for billing purposes in any month can be:

1. Time of Day: Dependent on the time of day (i.e., on-peak {usually during the day} and off-peak {usually at night}time periods) and/or the day of the week (e.g., Monday through Friday and separately for weekends): The metering system tracks the highest usage anytime during the month under the appropriate time windows. These pricing schedules are generally referred to as Time of Use (TOU) rates.

2. Seasonally Differentiated: For example, the demand charge might be higher during the summer than during the winter, or vice versa.

3. Declining Blocks: This is where the demand charge up to a given level is at one price with the price declining above that level. For example, the demand charge might be $10 per kW up to 10,000 kW demand, and drop to $6 per kW for demands in excess of 10,000 kW.

4. Interruptible Blocks: The demand charge depends upon whether the customer can reduce electrical demand to a given level if it is notified in advance by the utility. The price reduction often varies with the time of notice (i.e., the discount is higher if shorter notice is given). Some utilities also offer direct load control for air conditioning and water heating equipment, the utility itself can cycle this equipment on and off for brief periods.

5. Contract Minimum Demand or Ratchet : Certain rate designs incorporate minimum billing demands based upon historical peak demands. For example, if the peak demand last summer was 500 kW and the rate design has a 50% ratchet, the minimum billing demand would be 250kW (500 kW times 50%) for the following eleven months, regardless of whether the actual demands were lower.

The meter recording kWh power use during either a 15- or 30-minute time window also tallies total kWh use. This meter is read at roughly monthly intervals and total power use is billed according to applicable pricing schedules. The type of energy charge pricing in common use includes:

1. Time of day: For example, on-peak and off-peak time periods and/or the day of the week (e.g., Monday through Friday): These pricing schedules are generally referred to as Time of Use (TOU) rates.

2. Seasonally Differentiated: For example, the energy charge might be higher during the summer than during the winter, or vice versa.

3. Declining Blocks: This is typically where the energy charge to a given level is at one price and that price declines above that level. For example the energy charge might be $0.05 per kWh for the first 100,000 kWhrs used in a month and drop to $0.04 per kWh for the next 100,000 kWhrs.

Links to Related Topics

Understanding Demand and Consumption
Analogies for Understanding Demand and Consumption
Understanding the Electric Bill
Calculating Appliance Energy Use