Demand is the total amount of electricity being used by a consumer at any one time. It is measured in kilowatts (kW). Customers are billed according to kW of demand for their rate.  The kilowatt (kW) and the kilowatt-hour (kWh) are the basic units of electricity. Your meter measures these units, and your energy provider uses them to determine your monthly bill.

What is Demand Charge?
Demand charge is based on each customer’s maximum 15 or 30 minute demand on the energy providers distribution system each billing period. Demand is measured in kilowatts (kW). Customers are billed according to kW of demand for their rate. Demand charge may be a fixed charge per kilowatt, or divided into rate brackets: the highest charge on the first bracket, and lesser charges on the following brackets.

Why are Demand Charges Used?
Demand charges are the way your energy provider pays for generation and distribution capacity it needs to meet peak demand that occurs from time to time.

How is energy for commercial and industrial customers typically billed?

Basic Monthly Charge: Covers metering and accounting expenses.

Energy Charge: (kWh) Covers the cost to produce the electricity you use during a billing period. Energy charges are for the total amount of electricity used.

Demand Charges: (kW) Demand is the rate at which you use electricity at a given time. It covers the cost for the equipment (transformers, generators, power lines) needed to bring you service.  Demand charges are often available in several pricing methods:

Demand kW

• Actual highest On-Peak demand for the billing period
• Percentage of the highest on-peak demand during preceding 11 Months (Ratchet Percentage)

Energy Plus Straight Demand

• kWh consumed during a billing period multiplied by a predetermined cost per kWh
• Wh rate can be different for different times of day for On-Peak and Off-Peak operation
• Plus a demand charge (Demand kW  X Cost Per Demand kW)

Energy Plus Multi-Tiered Demand

• Similar to straight demand
• Demand rate is partitioned at different levels

Real Time Pricing (RTP)

• Customer is charged what market will sustain
• Customer is notified of hourly rates 24 hours in advance
• Cost per kWh vary wildly between On-Peak and Off-Peak times

How can demand charges be reduced?

• Understand how your facility is billed for energy
• Thoroughly examine and understand your operations energy usage
• Determine what low to no cost energy-efficient improvements can be made
• Does all of the equipment need to be running at the same time? If not, what can be turned off while other equipment is running?
     Can some other equipment be turned off while this equipment is running? The result may be a significant savings in your monthly demand charge.
• Plan and budget energy improvements to your facility with ROI if possible
• Implement and or update your M&M control system and utilize the energy savings features 
     Many time customers have energy saving features in their control systems but don't know they are there or how to utilize them.  Training classes are available for M&M Refrigeration control systems that will assist in getting the most out of your system.

Demand Charge Examples:
To illustrate how demand charge can affect an electric bill, let’s look at two simple examples:

Example 1:
Running a 20 kW load for one hour would result in usage of 20 kilowatt hours (kWh) and accrue a demand charge of 20 kW.
20 kW x 1 hour = 20 kWh.
Demand = 20 kW.

Example 2:
Running a 2 kW load for 10 hours would also result in usage of 20 kWh but would only accrue a demand of 2 kW.
2 kW x 10 hours = 20 kWh.
Demand = 2 kW

Both examples use the exact same amount of energy (20 kWh) and perform the same amount of work. However, the resulting bill will be very different.

If we apply a power rate demand charge of $8.80 per kW and an energy charge of 5.4 cents per kWh to both examples produces the following results:

Bill number 1
20 kW x $8.80 = $176.00
20 kWh x .054 = $1.08
Total = $177.08

Bill number 2
2 kW x $8.80= $17.60
20 kWh x .054 = 1.08
Total = $18.68 

Since you are billed for both demand and energy, keeping both components to a minimum will help lower your electric bill.