What is a demand charge?
Small business utility customers may have different charges on their electricity bills: energy usage, delivery, and demand. Depending on how they use electricity, two businesses in the same service area can have the same electricity rate and use the same amount of electricity but have different utility bills because they have different demand levels.
If you use power consistently throughout the month, your demand will be lower. If your business tends to use a lot of electricity over a short period, your demand will be higher.
Companies that use larger amounts of electricity will see demand charges on their bills based on the highest amount of power (kilowatt or kilovolt-ampere) needed at a given point in time. For example, a manufacturing company that runs a lot of equipment (machining equipment, compressors, power tools, etc.) all at once at a particular time of the day or week will have high demand levels.
How are demand charges set?
Distribution companies set demand charges in their Distribution Access Service Tariffs, which are reviewed and approved as part of other delivery charges by the Alberta Utilities Commission. Although demand charges mostly apply to industrial utility consumers, they may also be relevant to small businesses in some distribution service areas.
There is only one distributor per service area, so if the demand charges apply to your business, they will be the same regardless of which retailer you choose to supply your electricity.
Electricity distributors use demand meters to record the maximum amount of power a business draws for any given time interval (typically 15 minutes) during the billing period. This is your peak demand, and your power distribution company calculates the demand charges on your bill by multiplying the peak demand value (kW) by the relevant demand charge ($/kW).
The highest level of electric demand during a billing month is called peak demand. Peak demand used for billing purposes in any month can be:
- Time of Use (TOU) Demand. For example, your meter tracks the highest usage dependent on the time of day – on-peak, usually during the day, and off-peak, generally at night. Your demand meter can also track the highest usage on the day of the week: Monday through Friday, and separately for weekends. These pricing schedules are generally referred to as Time of Use (TOU) rates.
- Seasonal Demand. The demand charge might be higher during the summer than during the winter because of the increased costs of providing electric service during the period of peak system load.
- 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.
Why do utility companies apply demand charges?
Your utility provider builds infrastructure to maintain enough capacity to meet your business’ peak demand needs at any time. Even if your business only needs a large amount of power for a short amount of time during any given year, the utility must have the equipment (power poles, powerlines, substations, transformers) to provide that power. The demand charge pays for building and maintaining this essential electrical infrastructure.
How can I reduce my demand charges?
Demand charges can make for up to 60% of the delivery charges on your business utility bill. The good news is that even 24/7 operations can reduce this cost.
- To lower your peak demand, set a schedule to stagger equipment startup. This way, you will avoid turning on all your appliances or machinery within a single 15-minute window.
- Run equipment only when needed. Turn off unnecessary equipment at times of highest use or put some of it to "sleep" when it is not needed.
- Use high-efficiency appliances, equipment, machinery, and lighting.
- Right-size your equipment for the job. An oversized motor could increase your demand and cost you money.