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Demand: what it is. Why it's important

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mark easland's picture
president, Watermark Energy Reduction
  • Member since 2013
  • 2 items added with 1,005 views
  • Jul 27, 2022

This item is part of the Energy Efficiency - July 2022 SPECIAL ISSUE, click here for more

A review of Energy Central’s website shows a broad range of articles, all falling under the title of “Energy.” And all important. One topic that is very important to electric power customers, is getting their bills lower, especially in these times of high inflation. 
Energy efficiency plays an important role in bill reduction of residential and commercial customers. In addition, both sets of customers have looked to energy efficiency and solar, and other forms or renewables to reduce the kWh needed from the local power utilities.

However, one set of customers, that is, commercial customers paying demand charges, a focus on energy (kWh) reduction, or investing in local generation (of kWh via solar) may have little impact to the bill amount from the utility, much to the surprise of those customers as well as their unprepared or uninformed energy contractors.

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For these commercial customers, “Demand Charges” can constitute 60, 70% or higher percentage of a commercial customer’s bill. Efforts to reduce kWh, either with energy efficiency or local kWh production (solar, etc.) may have little or no impact on demand, thus little or no impact on the $ amount of the bill. A good understanding of “Demand Charges” is key to reducing this class of customer’s bills.

While the replacement of incandescent light fixtures, installation of higher efficiency equipment and other EE actions, will chip away at total kWh, and everyone can agree that this is good, the kWh chipping away effort is on the smaller part of the bill. The larger part of the bill is based on the "demand", that is the highest, typically 15 minute period of the billing month…and there might be a “ratchet” element too. More on that later.

This article will explain what demand is, how it is measured, why it exists, and how it can be reduced, so that customer’s bills can be reduced as well.

Sometimes “demand reduction” is considered the lowly stepchild of the energy field. Certainly, kWh reduction, which also reduced greenhouse gas emissions, get the well-deserved limelight, but customers want lower bills, and both utilities and customers benefit from even energy usage throughout the day. “Excess capacity” to react to extreme demand situations, is expensive to reserve, to buy, to hold and to maintain, and this is reflected in customer's bills.

What is demand?

Demand is the average usage of energy over a relatively short time period, often ranging from 10 to 30 minutes. Usually, 15 minutes. It is not the peak energy usage. Both peak energy usage and demand are expressed in kW, so both customers and utility employees confuse these two. Motors, for example, can use up to 10 times their running current to start. If we were to look at a fraction of a second, the peak of energy usage during motor startup is quite high. But the demand (average over 15 minutes) would be the sum of several seconds of high, with several minutes of normal running power to get an average very close to the running power. So while these two measurements (peak and demand) have the same units (watts or kW), they are not the same. Demand is the average usage of energy over a relatively short time period. (We will use 15 minutes for the rest of the article).

Why do utilities base bills partially on demand? Or why are they “allowed” to do this? An example answers this question best.

There were two neighbors. Both owned 15,000 gal pools. Both decided to drain their pools and acid wash them. But the neighbor on the right forgot that his daughter had a pool party on Sunday (this was Friday). The neighbor on the left had no plans like that. After finishing on Friday evening, the neighbor on the left put a hose from the front, a hose from the back, and slowly started to fill his pool. After a week, his pool would be ready for heating and fun in the sun. But the neighbor on the right had a problem. He needed his pool ready Sunday afternoon for a pool party. He called up his water company and asked if there was anything they could do. The answer was yes, they could run a 4 inch pipe from a water main, two blocks away, but there would be a charge, as the pipe would have to be buried. They discussed the charge, and he agreed. They started on Friday night and worked through the night. Saturday at noon the 4 inch pipe was ready, and after two hours the 15,000 gal pool was filled. The heater worked all night, and on Sunday the pool was ready and the pool party was a big success.

If both neighbors had been charged just for the water delvered, that is 15,000 gal, then that would not have covered the high cost to deliver the water in two hours. The “demand” for water from the two neighbors, was very different. Thus the charge for water delivery had to be different. 

Coming back to the electrical world, demand charges allow utility companies to say “yes.” If an owner of a factory wants to produce all products during one day shift, then she buys a lot of equipment, hires a lot of people, and uses a lot of energy in one shift. Another owner might decide to buy 1/3 of the equipment, hire people to work in three shifts over 24 hours, and yet use the same amount of kWh as the first owner. If the only way for the utility to recover costs was via kWh (remember, the same in these two examples), then the rates to the first owner would be way too low, and the rates to the second owner would be way too high. Demand charges enable utilities to say “yes,” and it more fairly spreads the costs of energy delivery.

This is why they exist in almost every electric utility, across the nation.

Another characteristic of demand charge is typically a “ratchet” clause in the rate. What is a ratchet clause? 

A typical demand rate is worded like this: “The billing demand shall be the highest average kilowatt (kW) load measured during the fifteen (15) consecutive minutes of maximum use; or 75% of the highest maximum kW demand in the previous eleven (11) months; or fifty (50) kW, whichever is greatest.” Note the “…whichever is greatest.”

The “ratchet” clause is the “…75% of the highest maximum kW demand in the previous 11 months.” It takes almost a year to get “rid” of a high demand event. And utilities know this. Sometimes a call with an explanation (leading to a demand event forgiveness) will save a lot of money. Or a call to request a demand “reset” after significant demand reduction efforts. It is worth a call and try.

On demand rate customer energy bills, the date and time and value of the highest demand for the month is printed. But this record is of little use, to someone who is interested in understanding and reducing the demand charge. The typical customer will note that over the months, the value goes up, goes down, the day of the month varies, even the time varies from bill to bill. It is basically impossible to draw many conclusions from the information printed on bills.

The only real way to understand a customer’s energy usage is to obtain the interval data. This is a massive amount of data. For 15-minute interval data, there are 4 values per hour. 96 values per day. 2880 values per month. 34,560 values per year. Since utilities have a one year ratchet, you might need a year’s worth of data.

I have found that using a spreadsheet, and using the feature of data bars, an easily managed graph can be created. The eye can quickly scan weeks, months even years of data if necessary. A “feel” for the energy use can be obtained in this way. Does the usage have high peaks that could be easily managed? Or does it look like a sand mound, starting at 8:00 AM and ending at 8 PM. A situation very difficult to change.

An example of a high peak is a local business that had 12 electric forklifts. At the end of the shift, all 12 got plugged in at the same time. It only took 2 hours to charge them up, but a tremendous amount of energy was necessary during those two hours. A simple timer with contactors to spread out the charging, cured the high demand. Now at the start of the shift the next day, the forklifts are ready, but the demand is a fraction of what it was before. This is a case where looking at the demand data, walking around the customer's location provided the insight to a low cost demand reduction method.

Batteries can be used to carve off the top of demand as well, as a "cure all." But the batteries can never take a break, never go off line, otherwise the ratchet might get the customer back to the same situation that existed before the application of expensive battery energy storage.

Finally, a solar energy system can be more effective if partnered with demand control and perhaps energy storage.


The first diagram is demand plotted over a day, and is typical for many schools, office buildings, and governmental buildings. Demand starts at 8:00 AM and ends about 8:00 PM. The second diagram shows a school with solar. Note that in the middle of the day the demand gets reduced to zero, but there is significant demand at the start and end of the day. Also clouds come over and demand can set a new peak, despite large solar generation. The third diagram is an example of a single very high demand time period. This is typical of the forklift example above, and easy to fix.

In review, commercial customers, who’s bills are significantly based on demand usage, will be greatly interested in how demand is measured, documented, and mitigated. While demand charges provide the greatest flexibility and options for customer’s energy usage, and fairness to others, it comes at a significant financial cost (up to 80% of the bill). The information printed on the bill does not begin to tell the story of a customer’s demand. The only way to truly understand demand is to obtain the interval data and process it for easy analysis, potentially using data bars in an excel spreadsheet. Once a good understanding of how energy is used, and maybe a walk around the customer's facility, potential mitigation efforts can be proposed, which might include spreading out energy usage, demand limiting systems, solar and smart storage.

About the Author: 

Mark Easland holds an Electrical Engineering Degree, a Masters Degree in Data Communication, and is a CEM (Certified Energy Manager).  He is available to consult, train or discuss demand and other billing elements.  He has worked at power utilities, major Information Technology companies like IBM and Emulex and can be reached at

Matt Chester's picture
Matt Chester on Jul 27, 2022

Very interesting assessment of how and why utility bills look the way they do right now. Do you expect that the changing profile of utility customers (e.g., how EVs will quickly become a significant part of the typical demand profile) might force utilities to relook at this all freshly? 

Kimberly McKenzie-Klemm's picture
Kimberly McKenzie-Klemm on Jul 27, 2022

I think the "hidden cost" approach is relative. Educated consumers' profiles can be relied on for pulling on more than just a bill reduction.

mark easland's picture
mark easland on Jul 27, 2022

Matt Chester:  thank you for your question. Yes, EV has the potential for dramatic change in electric energy consumption and delivery. If you think about all the gas stations in your area, imagine the energy content of those gas stations, now convert it all to electrical energy, you have an idea of the scale of the change coming. Looking to other industries (like telecommunications) where technology and customer expectations forced epic changes, electric power could be headed in a similar direction. All of us are in a front row seat to witness. Hang on!


Gary Griffin's picture
Gary Griffin on Jul 27, 2022

Excellent explanation.  We need more solutions to help customers manage their demand from the utilities for energy!

mark easland's picture
Thank mark for the Post!
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