Understanding Electric Consumption & Demand Charges

Electric energy prices have been rising constantly for the last few years, and more rate increases are predicted for the future.  If you’ve ever had a chance to study your utility bills, you probably noticed that the majority of your total cost is comprised of charges for consumption and charges for demand.  In some cases, the demand charge can exceed the consumption charge, and in many cases, the demand charge accounts for nearly half of the total bill.  So, it’s a good idea to understand how these two billing factors are calculated so you can determine the best ways to limit both and save your enterprise some money.

Electricity is Energy, But Knowledge is Power

This blog post will concentrate on the two biggest charges found in most commercial electric utility bills – consumption (measured in kWh), and demand (measured in kW).

Energy Consumption

Your electric consumption charge is easy to understand and calculate.  Consumption is measured in kWh (kilowatt hours).  This measures the amount of energy you use during the billing period.  kWh prices vary widely.  Depending on your geographic location and utility rate plan, you could pay as little as $0.03 or as much as $0.30 per kWh or more.

EXAMPLE A: If your building used 10,000 kWh during the billing period (usually about a month), and your rate was $0.10/kWh, then your consumption charge would be:

10,000 kWh * $0.10/kWh = $1,000

You can reduce the amount of kWh you consume by making sure your HVAC is carefully controlled, so you aren’t over air conditioning or overheating spaces in your building, or conditioning the air when buildings are unoccupied.  You can also reduce your consumption by making sure that energy-consuming equipment like lights, office equipment, exhaust fans, battery chargers, and cooking equipment is turned on only when needed.  The GridPoint Energy Management System provides the perfect platform for doing this.

Energy Demand

Demand is a more complex subject.  To the electric utility, demand represents the amount of electrical power that has to be generated at any given time.  In other words, the utility has to be able to deliver enough power at any time during the day to deliver the maximum amount of power needed by all of its customers.  As demand increases, more power sources must be found – this can be very expensive.  That expense is usually passed on to the utility’s customer base.  To the consumer, demand represents how fast you use energy and how efficiently you use it.

The speed at which you use electrical power is measured in kW (kilowatts).  Your demand will vary as HVAC cycles, lighting, and other loads are turned on and off.  The electric utility usually measures demand as an average of the power you draw in a 15-minute period.  Very short bursts of demand, for instance, when demand surges occur when electric motors turn on, will have little effect on the average 15-minute demand.  But, longer periods of demand will have a big impact.  For instance, leaving a large electric motor (i.e., a kitchen exhaust fan) turned on constantly will have a significant impact on your 15-minute demand.

The unit cost of demand (kW) is always much higher than the unit cost of consumption (kWh).  Consumption is typically charged at a few cents per kWh.  Demand is usually charged at a few to several dollars per kW.

EXAMPLE B: Using EXAMPLE A, and applying a demand charge – for instance, 100 kW average 15-minute Demand charged at $10/kW – the monthly bill would become:

10,000 kWh * $0.10/kWh + 100 kW * $10/kW = $2,000

Demand charges just doubled this monthly bill.

Your demand charge can also be influenced by a characteristic called the power factor. Power factor is a measure of how efficiently your site uses electrical energy.  If your equipment uses energy inefficiently, it will exhibit a low power factor, and the electric utility must have more generation capacity online to serve your needs. On many electric bills, you’ll see your power factor measurement. The power factor is denoted as a percentage. A 100% power factor means your equipment is using power with 100% efficiency. Utilities usually apply a multiplier to your demand charge for power factors below 90%. Power factor multipliers of 1.2 to 1.5 are common.

EXAMPLE C: Using EXAMPLE B, and assuming an 80% Power Factor and a 1.2 Power Factor Multiplier the monthly bill becomes:

10,000 kWh * $0.10/kWh + (100 kW * $10/kW) * 1.2 = $2,200

 If your building uses energy at a low power factor, your bill will increase.

And finally, you may also see two different types of demand on your bill – actual demand and billing demand.  Actual demand is just what it sounds like – the highest actual average 15-minute demand measured during the billing period.  The billing demand is the highest 15-minute demand measured at your site in previous months.  Each month you could be billed the higher of these two numbers.  Bills that show actual and billing demand use a factor called demand ratchet.  This simply means that if you demand a lot more power during one month – for instance, during July in Miami – then the highest average 15-minute demand for that month will be billed for July and the next 11 months even if the actual demand is lower during subsequent months.  The only exception to this rule would be if your actual demand was greater than the July demand in a subsequent month – for instance, August in Miami – then the demand that would be billed would increase to that higher number for August and be used as the billing demand for the following 11 months, regardless once again of your actual demand.  When your rate includes a demand ratchet, you will be locked into your highest demand for 12 months (some utilities use six months, others use 18 months, but most ratchet plans use 12 months).  Managing your demand is always a good idea. Managing your demand when you have to live with a demand ratchet is critical.