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EV Market

What are Demand Charges and How to Save Money


November 11, 2021

Let’s start by saying that demand charges aren’t a new invention.

In fact, demand charges have been around for over 100 years, since the early days of electricity grids. Demand charges are simply a way of charging those whose electricity use exceeds a normal amount (more on how it is calculated later).
The problem is, the technology used to supply and monitor power usage has progressed significantly over the last century, but the method of charging remains more or less the same.

In this article, we’ll begin by describing how demand charges are calculated, why demand charges are seen to be unfair for some users, and look at ways to reduce and control demand charges.

What is a Demand Charge?

In contrast to the common kWh charge found on your electricity statement, which reflects your overall energy consumption, an electrical demand charge concentrates on a different aspect: your highest power usage. Picture it as a dual-pronged approach to electricity billing, where kWh gauges the distance you travel (energy utilized), and the demand charge captures your maximum speed (peak power drawn) throughout the billing period.

Demand Charge vs Energy Charge

Electrical energy charge is determined by the total electricity consumption measured in kilowatt-hours (kWh) over the billing period. Your meter tracks both on-peak and off-peak energy usage. Electrical demand charge, on the other hand, reflects the rate at which you utilize electricity, representing the amount required to operate your business at any specific moment. Demand charges are incurred based on the peak level of electricity consumption during the billing period and the corresponding time of day crucial for your business operations.

Why Demand Charges Matter

Peak demand puts stress on the electrical grid, requiring significant investment in infrastructure to handle those brief surges. Power plants need to be sized to meet these peak demands, even though they may only be used at full capacity for a few hours each year. This translates to higher costs for electricity providers, which are ultimately passed on to consumers through demand charges.

Changes in Technology, No Change in Charging

Source - Demand Charge Example

Recent years, in particular, have seen big technical improvements in energy metering and meter reading, with the introduction of smart meters. Since this development, many people are now seeing demand charges as unfair, as there should be a more accurate way to calculate usage and cost.

From an engineering point of view it makes sense to use the old method as it reduces the capacity needs of the system. From a user point of view, it seems unfair to pay high energy bills just because of a surge of high energy use during one 15 minute period in the month.

For example, EV users are hit hard under this system as they will create a large spike every night while recharging their vehicles.

Also, most utility companies specify the maximum power demand a customer is allowed per month. Exceeding that maximum power demand over consecutive months often results in the customer being moved to a tariff with a higher demand charge.

Demand charges can make a significant difference to monthly electric bills.

How to calculate a demand charge

X kW of demand * Y $/kW = $ Monthly Demand Charge

For example, if the rate includes demand charges set at $12 per kW, and the peak demand is 400 kW for the month, the demand charge would work out as :

400 kW *  $12 =  $4,800

Some areas have even introduced a mandatory residential demand charge. Massachusetts, for example, has imposed a demand charge since 2018.

demand charges table

How to Reduce Demand Charges in Electricity

The good news is that everyone can “fight” demand charges. There are three main steps to reduce demand charges: define, understand and reduce.

  1. Energy demand is usually driven by a short intensive use of energy. This can be caused by factors such as weather (more heating or cooling needed), or a large wave of users (e.g. many vehicles arriving at an EV charger at the same time, at a workplace for instance). You need to define what causes the demand increases and how you can react.
  2. Use a monitoring system and simulate the demand for your site during different scenarios. Identify what is driving demand and calculate the financial impact of demand charges on your total operational costs. For example, at we use precise simulation tools to simulate the charging of EVs even before installing a new site
  3. Active management of demand can’t take place 24 hours. Instead, focus on the main peak activities and actively manage those times, once or twice per day or week. You only need to reduce the highest peak during the month or prevent your demand exceeding a certain limit.

Reducing demand is definitely worth doing. Just think, with demand chargers of 15 USD/kW, you save 18,000 USD per year when reducing your peak demand by 100 kW.

Reducing Demand for EV Charging Point Operators

At – Smart Charging solution for electric vehicles – we have developed a predictive monitoring and control system for charging point operators.

This intelligent system will save you money each month and saves you the time and effort of monitoring and controlling it yourself.

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