What is a demand charge on an electricity bill?

A demand charge is a charge for the highest rate at which you drew electricity during a defined window, billed per kilowatt of that peak rather than per kilowatt hour of consumption. It is the one line on a bill that is not about how much you used, but about how hard you pulled at your worst moment.

That distinction is the whole thing, and it is why a demand charge can rise in a month when your usage fell. Everything below follows from it.

How do you calculate demand charges?

Take the highest average demand your site recorded in any single interval inside the charging window, usually a half hour, measure it in kilowatts, and multiply it by the demand rate and by the number of days in the billing period. Some networks apply the rate per kilowatt per day, others per kilowatt per month, and the arithmetic follows whichever your tariff states.

Three details do most of the damage when people try this on their own bill.

The peak is an average over the interval, not an instant. A motor that draws hard for four seconds does not set your demand; the same load running for twenty five minutes does. Half hour metering is measuring energy over the interval and reporting it as a rate.

The window matters as much as the peak. A tariff that only measures demand on weekday afternoons does not care what your equipment did at six on a Sunday morning. A tariff that measures all day and every day does.

And the peak often persists. Many tariffs charge on the highest peak recorded in the last twelve months rather than in the current period, so one bad afternoon can sit on every bill for a year. Your bill states which convention applies, usually near the demand line and usually in smaller type than the amount.

What does demand mean on an electricity bill?

Demand is the rate of electricity use at a point in time, measured in kilowatts, as distinct from consumption, which is the quantity used over a period and measured in kilowatt hours. Your consumption is the distance travelled. Your demand is the fastest you drove.

On the bill it appears as a line priced in kW or kVA, often labelled maximum demand, anytime demand, capacity, or with a season name attached. If every line on your bill is priced in kWh and cents per kWh, you are not on a demand tariff and this page is background reading rather than an action item.

How to reduce demand charges?

Flatten the peak, which in practice means stopping your largest loads from running at the same moment. Nothing about it requires using less electricity overall, which is what makes it unusual among energy savings.

The moves that work, roughly in order of how often they pay off:

• Stagger the start of large equipment. Ovens, compressors, chillers, pumps and heaters that all switch on at opening time create one peak that then prices the entire period. Staggering them by twenty minutes each can cut the recorded maximum without changing a single process.
• Move what can move out of the measured window. If your tariff measures weekday afternoons, pre-cooling, batch runs, dishwashing, charging and heavy cleaning belong outside it.
• Find the peak before you try to fix it. Interval data from your meter, which your retailer must provide on request, tells you the day and the half hour that set the charge. Guessing at it usually finds the wrong load.
• Check whether the peak was a one-off. If your charge is set from a twelve month maximum, one unusual event, a fault, a test, a hot week with everything running, may be pricing every bill since. It is worth identifying, because it will not clear itself until the twelve months roll past.
• Consider whether the equipment needs to be that big. Oversized plant cycling on and off draws its full starting load every time it does.

Solar helps only when the sun is up during the measured window, and helps a great deal when it is. A battery can shave a peak deliberately, which is the one energy asset whose value on a demand tariff is easy to state.

Can I opt out of demand tariff?

Sometimes, and it depends on your network rather than your retailer. The tariff assigned to your site is set by the distributor, usually according to your connection size and your metering, and retailers sell plans that sit on top of whatever the network has assigned.

Where a network offers more than one tariff for a site of your size, you can ask your retailer to request a reassignment, and networks generally allow a limited number of changes in a period. Where the network has made demand tariffs the standard for your connection class, there is no plan you can buy that removes the charge, and a retailer telling you otherwise has misread its own product.

Two things worth knowing before you try. Moving off a demand tariff usually means moving onto higher usage rates, so it is a trade rather than a saving, and whether it pays depends on your own load shape. And the request goes retailer to network, which means a phone call and a wait rather than a switch.

What is the difference between a demand charge and a capacity charge?

A demand charge prices the peak you actually recorded; a capacity charge prices the capacity your connection is contracted to be able to deliver whether you draw it or not. One is measured after the fact, the other is agreed in advance.

The practical consequence is that a capacity charge does not respond to anything you do with your equipment. It responds to a change of contracted capacity, which is a conversation with the network about your connection rather than a change to how you run the site. If you have reduced your load substantially since the connection was sized, that conversation may be worth having.

Bills are not consistent about the labels. Some print capacity for what is plainly a measured demand charge, and some do the reverse. Read what the line is priced on rather than what it is called.

What is the difference between kW and kVA on a demand tariff?

Kilowatts measure the real power your equipment converts into work; kilovolt amperes measure the total power the network must deliver to supply it, including the part that circulates without doing work. On a site with motors, compressors and older lighting the two figures diverge, and the ratio between them is your power factor.

Which one your tariff charges on matters, because a site with a poor power factor can be billed on a kVA figure meaningfully higher than its kW figure. That is also why power factor correction equipment exists and why it is sold hard: on a kVA tariff it reduces a real charge, and on a kW tariff it mostly does not.

When we price a plan that names kVA in its terms but publishes no power factor, and your bill prints none either, we price the demand one for one against the kW your bill states and say that no conversion was applied. Inventing a power factor to make the arithmetic look complete would produce a confident figure that is wrong by however much we guessed.

Why do demand charges change between summer and non-summer?

Because networks are sized for their worst day, and their worst day is a hot one. Demand tariffs recover the cost of that capacity from the periods that create it, so most publish a higher summer rate, a longer summer window, or both, and a lower rate for the rest of the year.

The season boundaries are set per network and stated as dates in the tariff, and they do not all agree. Your bill may show two demand lines, one per season, when a billing period straddles the change. Some networks also run a separate winter definition.

This is also the trap in comparing a summer bill against a winter one and concluding something about your equipment. Where a plan publishes several demand rates for one site maximum, seasons or windows, we charge the dearest of them rather than summing them, which is what the tariff actually does.

Do demand charges work differently on each electricity network?

Yes, and that is the main reason the charge is hard to reason about. Each distribution network sets its own tariff structures, its own measurement windows, its own season dates, and its own rule for whether the charge follows the current period's peak or a rolling maximum. Two businesses on the same retailer's plan, in the same state, behind different networks, can face genuinely different demand mechanics.

None of that is a retailer's choice, and none of it is a conspiracy. Demand tariffs are a network cost-recovery mechanism: the poles, wires and substations have to be built for the peak, so the cost of the peak is charged to the sites that cause it. It is defensible economics that happens to be close to unreadable from a printed bill, which is a different complaint and a fair one.

What it means practically is that a demand rate quoted without its network, its window and its season definition is not enough information to price anything. When we compare plans we price against the tariff your site is actually on.

Do demand tariffs cost a business more or less than a flat rate?

It depends entirely on your load shape, and the answer is genuinely not knowable from the rates alone. A site with steady, spread out consumption tends to do well on a demand tariff, because it is being charged for a peak it never creates. A site whose whole day happens in one two hour rush tends to do badly, because that rush prices the entire period.

This is the part a rate table cannot answer for you, and the reason we ask for a bill rather than a postcode. Your bill prints the peak your site actually recorded and the usage split across the windows that recorded it, which is exactly what the comparison needs.

So the arithmetic is available. Upload your business bill and the engine prices the published plans for your site against your own demand and usage, and ranks them by projected annual cost. Where a demand plan cannot be fully priced from what your bill prints, it is flagged as incomplete and ranked below the plans that can be, rather than being quietly given a favourable guess. Where a plan measures its demand in a different window from the one your current plan measured, the figure is presented as an approximation, because that is what it is.

Related reading

If the bill in front of you is the puzzle, how to read a business electricity bill walks it line by line, including the kW and kVA lines. For the full set of tariff structures and how each one charges you, electricity tariffs explained. And to compare what your site would pay across the published plans, start at business electricity plans.