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What are demand charges on my electric bill?

Avatar for Dan Hahn
Published on 02/10/2020 in
Updated 02/12/2020
A bill with a big dollar sign on it coming out of an envelope

In Short:There’s a new fee popping up on residential power bills called a “demand charge”. For those of us lucky enough to have solar panels installed, this fee can be reduced. We’re here to help you understand what demand charges are and how you can minimize them.

Residential Demand Charges

Recently, we’ve seen utility company proposals for fees called demand charges on residential power bills. After all, utility companies are not too keen on more of their usage fees eroding due to broadened home solar access and smarter home appliances, even though both may be better for the planet.

Arizona utility company SRP has moved beyond the proposal stage and has enacted a residential demand charge pilot. We expect to see more of these types of charges enacted across the country as utilities plan for more financial stability over the coming decades.

What’s the difference between demand charges, customer charges, and energy charges?

To best understand what these new demand charges are, it’s helpful to compare them to other fees you see on your bill like customer charges and energy charges.

Customer charges are fixed dollar amounts you need to pay each month which are meant to tie together with fixed utility administrative and overhead costs.

Energy charges are the most recognizable fee, associated with the total amount you use during a month, measured in kilowatt-hours (kWh).

Demand charges are fees associated with the maximum rate at which you used electricity during the month, measured in kilowatts (kW).

Currently, demand charges are mostly found on commercial electric bills. Many utilities argue it is expensive to maintain the ability to be prepared to serve the highest demand customers in just a few locations, even though these peak demand scenarios only play out in reality sporadically.

For example, if a t-shirt factory gets a huge order for presidential nominee shirts and they need to ramp up production, they’ll pay the utility company for the ability to scale up production whenever the company “demands” the power to be available. The utility demand charges are meant to handle costs to make enough electricity and move it from a power plant to a building under peak conditions.

Demand charges are increasing across the country while electricity prices are decreasing. Energy economists expect demand charges to make up a higher percentage of your electric bill over the coming years, even though time of use rate structures offer superior incentives to balance loads on the grid.

How your utility calculates demand charges

If your power bill includes demand charges, your power company likely monitors your monthly usage over 15 minute increments and makes note of the time block where you use the most power. For example, say your power company charges $5 per kilowatt per month for demand, and your peak 15 minute usage during the month was 20 kilowatts, which occured from 6:45p to 7:00p. Here, they’ll bill you $100 for demand charges for the month, which gets added to your customer and energy charges.

How residential solar can help counteract demand charges

If you’re lucky enough to have a regular peak demand timeframe on your bill before you go solar which happens in the middle of the day, solar can help out a whole bunch.

Two people's faces two charts showing the load profiles of an airbnb rental and a school, with solar reducing demand during the day

Take a look at the above example. On the right, let’s think about Isabel, who runs an in-home day school and she installs solar. On the left, let’s consider Ron, who regularly rents out his garage apartment to Airbnb renters. He also goes solar.

Isabel’s electricity demand is highest in the middle of the day, and has regular peak electricity demand in the early afternoon. Since her solar panels will generate electricity in that same timeframe, her demand charges will be reduced because her net load is less at this time of day.

However, Ron’s Airbnb hotel guests don’t use much power in the middle of the day. Instead, they are out and about, get a little fat and tipsy, and then stumble back to the garage, interested in using the oven, cranking up the electric heat, and watching loud movies.

Ron’s peak demand is in the late evening, and the time period where his shiny new solar panels crank out electricity does not overlap with the time his renters are gorging themselves with frozen pizza and making a mess of his couch.

Therefore, even though his net load is reduced by a similar amount as Isabel’s, his demand charges aren’t reduced much, because his peak demand is still the same as it was before.

What about net metering?

Net metering allows you to get credits for the power you produce with solar during the day and then apply those credits when you use power, say in Ron’s case in the middle of the evening. Depending on how friendly your state and utility is for net metering standards, the amount you can save with solar may vary drastically.

Given that you may also be in an area which has time of use rates as well as demand charges, (maybe even multiple demand charges) it’s crucially important to be able to forecast when electrical demands may be high and have a plan to reduce your usage peaks and costs as much as possible. Every situation is unique, we recommend getting in touch with our network of local experts who can help you model your savings from solar.

Demand charge forecasting isn’t bulletproof (or thunderstorm proof)

Generally your solar installer is pretty good about estimating how much sunlight will hit your roof over the course of the year to forecast energy needs. However, you could still experience peak demand on a day when it’s really dark and rainy outside. Therefore, there’s some risk and uncertainty in estimating demand charge savings from going solar.

How battery storage can offset demand charges

If you do not live in an area known for its strong net metering policy, but still are subject to demand charges, it could be a wise idea to explore battery storage options. In Ron’s case, if he were able to charge an on-site battery with his solar panels in the middle of the day, then discharge those batteries regularly during his peak demand timeframe, he’d be able to save much more money by offsetting his usage charges and his demand charges. Click here to explore our guide to powering your home with batteries and solar.

Last modified: February 12, 2020

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