By Chris Hart, Manager of Engineering & Analytics

More and more often in solar conversations, the topic of demand charge arises, but there’s still confusion about the subject. Over the next several weeks, Alta Energy will run a blog series designed to help you better understand the intricacies of demand charges, how a solar system may reduce your demand charge, and other possible ways you and your business can mitigate demand charges from your electric bills.

There are primarily three types of charges on an electric bill: fixed charges, energy charges and demand charges. Fixed charges are usually small charges that do not change from month to month (although some utilities are beginning to increase these charges more aggressively). Energy charge is based on the amount of electricity (kilowatt-hours) consumed over the billing cycle. The amount of electricity being consumed at any single moment is the called demand (kilowatts). A good way to think about this is a measure of water usage – there’s one charge for the amount of water used (gallons vs kilowatt-hours) and a charge for the maximum flow rate used during the billing period (gallons/min vs kilowatts). Demand charges exist because utilities need to have infrastructure in place to supply electricity at the times of highest demand throughout the year. Just as in our water flow example, the pipes carrying the water need to be large enough to handle the biggest flow rate of the year.

For each 15-minute period of the billing cycle, the average demand is calculated. Demand charge will be calculated based on the maximum 15-minute demand of the billing cycle.  In the graph below, the peak demand was ~220 kW, and occurred in the 14:45-15:00 time slot.


Many utilities will charge their commercial and industrial customers several different demand charges per billing cycle, often based on segmented time periods during the day. For example, on the Pacific Gas and Electric E-19 rate, customers pay 3 distinct demand charges per month: maximum demand, maximum peak demand, and maximum partial peak demand. Maximum demand refers to any time of the whole billing month, maximum peak demand is calculated Monday through Friday from 12pm to 6pm, and part peak are the 2-3 hours on either side of peak. The same graph shown earlier is seen below overlaid with PG&E TOU spans. Charges can also vary seasonally, with PG&E E-19 rate being split into Summer and Winter months. This type of “time-of-use” structure, where charges vary based on when peak demand is occurring, is fairly common in commercial and industrial rate structures. There are other, more complicated forms of demand charge, such as the customer demand charge, where the peak is determined based on a rolling 6 or 12 month maximum demand.  For clarification, a thorough analysis of your electricity bill is a must.

Utilities typically charge commercial and industrial customers for their “demand rate”, which in some cases can make up greater than 50% of the total bill. If a significant portion of your bill reflects demand charges and you are thinking about installing a solar system, understanding how solar can be used to mitigate demand is essential.

Next time, we’ll look at how solar can be effective in reducing demand charge. We’ll also analyze a real world example and highlight some of the difficulties and nuances in modeling possible demand charge reduction using solar and other renewable energy solutions.

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