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What is Peak Demand?

Peak demand is one of the factors that determines the charge rate of your electricity bill. Peak demand is the highest amount of energy used during a 15-to-30-minute period of time during the month. It determines a large part of how your rate per month is established. You’re effectively paying for kilowatt-hours (KWH) used during a short period because it produces an unexpected load on the electrical grid.
Utility companies are responsible for having the capacity to supply your residence or business with the maximum amount of electricity that you would use whenever you demand it. Electricity needs to be generated, transported, sold, and consumed all at the same time. Because of this, utility companies must manage a balance of how much electricity generation and how much infrastructure is required to meet their customer demand at any given time.

To maintain the stability of the grid, any electricity that is being produced must be used immediately. Utility companies need to have enough standby equipment like transformers, sub-stations, and generation facilities to meet all of their customers’ demands. Utility companies evaluate demand charges to help offset this expensive standby capacity.

Demand charges are normally charged to large commercial, agricultural, and industrial customers only. However, there are some utility companies that also apply demand charges to residential customers. Demand charges are designed as a way for utility companies to recover some of the costs associated with meeting instantaneous energy demand. The utility companies attempt to disperse the cost of building and maintaining the capacity of their power systems to customers who use the most energy. Almost all medium and large commercial customers pay demand charges.

Demand charges are typically based on monthly peak demand. However, some additional kinds of demand can be measured.

Daily Demand

Energy demand for a facility can vary throughout the day depending on production and hours of operation.
Peak demand usually occurs during the hours when the facility is operational, and production is in full swing.
Baseload is defined as the energy consumption level when only essential systems are operating. This is constant regardless of the time of day or year.
Average load is the average consumption over a defined period of time.

The graph below illustrates a typical facility’s daily energy use:

Seasonal Demand

The United States is a large country and has different types of climates depending on the region. This factors into seasonal demand.
The western and southern regions have higher temperatures in the summer. This means that they have a higher electricity demand during that time.
The east and Midwest have colder winters. This means that they have a higher natural gas demand during that time.

The graph below illustrates a typical facility’s seasonal demand:

Typical Electrical Demand

Seasonal Variations In Electricity Demand

How is Peak Demand Calculated and Applied to Your Electricity Bill?

Utilities set demand charges annually, usually based on their peak demand requirements during the summer months. Utility companies usually measure demand as the average electricity used over a 15-minute period.

There are two types of charges on your electric bill related to electricity:

Consumption charge

This is the overall amount of energy used (in kilowatt-hours (kWh)), multiplied by your cost per kilowatt-hour for this energy ($/kWh).
This equals total energy use during the billing period.
(kWh used) x ($/kWh) = total energy use/period

Demand charge

This is based on “time of use” pricing. Your provider charges more for energy used during times of peak demand.
An example of this is daylight hours during the summer. Demand charges are the maximum amount of energy in kilowatts (kW) drawn by your company during specific high-demand time periods of the day, multiplied by a rate per kilowatt ($/kW) that is higher than ordinary consumption charges.
(Max kWh) x ($/kWh) = demand charge

Utility companies usually calculate your demand based on 15-minute increments of the highest consumption from your previous month’s usage. They then multiply that by a predefined rate to calculate your demand charges. For example, if your utility company charges $10 per kilowatt per month for demand, and your peak 15-minute increment usage was 75 kilowatts, you will be billed $750 in demand charges.

Demand charges are made in addition to your customer charge, distribution charges, and energy supply costs. For many businesses, demand charges can make up a large portion of their electric bill. They can account for up to 70% of your monthly energy bill. Some types of businesses incur higher demand charges than others, based on the amount of energy their equipment uses. Because demand charges are applied when you need energy the most, your company is paying these higher demand charges even if its energy use doesn’t spike during this time.

Where To Find Demand Charges On Your Electricity Bill

How Can Peak Demand Charges Be Reduced?

Energy pricing can be very complex. Two exact same buildings can use the same amount of energy, yet their utility bills can be very different. This means that solutions for the reduction of peak demand charges need to suit the energy consumption characteristics for each one.
Before deciding on a course of action, you must first understand a few things about your facility’s energy use:
Understand when and how you use electricity. Your utility company should be able to provide you with a detailed breakdown of your energy consumption throughout the month.

Knowing what to focus on and when to target it is the first step in reducing peak demand. Energy is observed as the total amount of electricity that comes into the building, making it very challenging to draw conclusions from a utility bill alone.

Each facility has a unique load profile; one peak demand reduction plan will not apply to all of them. Developing an effective peak demand reduction strategy requires granular and equipment-specific energy consumption data. Real-time monitoring of equipment can help to identify peak demand issues before they show up on your utility bill.

General high-level recommendations

  • Install timers and sensors – Examples include motion-activated lights and equipment shutdown timers.
  • Use a renewable energy source – If most of your electric demand is during the day, then a solar panel system has the potential to reduce your demand charges.
  • Invest in an energy storage solution – Investing in a battery storage solution allows you to store energy generated from your solar system that can be used during peak times, or whenever you have a spike in energy. Energy storage solutions are a great way to reduce demand charges, but they require a sizable upfront investment and ongoing maintenance.
  • Use a generator – A generator can be used to supplement your energy consumption during peak times and reduce your draw from the grid.
  • Participate in a Demand Response program – Utilities typically have demand response programs that help to reduce, offset, or even eliminate demand charges. In most cases, you are required to allow the utility company to manage loads during peak times. They usually offer financial incentives and/or rebates for participation in these programs.

Commercial facility recommendations

There are three methods that can be used for demand reduction in commercial facilities. Each one is dependent on the type of business operation that you have.

  • Peak Distribution (Scheduling) – The most frequent contributor to high peak demand is several energy-intensive activities operating at the same time. Schedule these systems to run at off-peak hours and to cycle different pieces of equipment so that all of the equipment is never on at the same time. This can be done through an existing building automation system, or through onboard controls. This method distributes the amount of energy used over a larger period, creating a load-leveling effect, and reducing peak demand.
  • Peak Shrinking (Energy-Efficient Equipment) – Install equipment that uses less energy. This reduces the baseload of energy that is used generally. An example would be to retrofit an old lighting system with LED fixtures.
  • Peak Shaving (Localized Energy Resource) – Supplement energy from the grid by storing or generating it yourself. Batteries can be charged with energy from the grid and then used during times of high consumption to reduce energy taken from it. Using solar panels is an example of generating your own energy that will also reduce energy drawn from the grid. Here is an example of how using stored energy can be used during peak events:

Peak Shaving Electricity

Industrial facility recommendations

Some industrial sectors may be better suited for demand reduction than others. Facilities that have more flexibility in product scheduling and process timing will find it easier to do. Examples include facilities that build custom pieces, work in batches, or are categorized as job shops.

Facilities that have a consistent, continuous, and steady power draw from the grid will find that demand reduction can be much more difficult.

Facilities that operate continuously near their processing capacity will also have difficulties. Examples include facilities that are categorized as continuous or repetitive. This means low variety but high volume.

These concepts are exhibited in the graph below.

Classification Of Industrial Processes

There are four ways that an industrial facility can control demand:


  • Eliminate Load – Permanently remove part of the industrial process or unnecessary power that a facility draws. This is the simplest method but the most difficult to implement. This will cause a direct impact on energy and peak demand costs. Examples include cutting electricity to unused buildings or shutting down an old unused processing line.
  • Reduce Load (Energy Efficiency) – Reduce energy consumption by using less overall energy to accomplish the same task. This is the first thing that should be considered when attempting to reduce energy usage. An example is to shut down equipment or to put it in standby mode.
  • Move Load (Demand Management) – If you can’t reduce load any further through elimination or reduction, you can then try to manage demand. There are two ways to do this:

Load Shifting

If high-demand processes run at the same time, shift them so that they no longer run together. Shift the processes that have the highest demands during off-peak times. Load shifting works best for batch type and short-run manufacturers. The downside to this strategy is that it can be costly and cause operation interruption.

Load Shifting

Load Shedding

Lessen unknown peak demands by using an alternative source of power outside of the grid. This is not usually planned and happens on short notice. It is temporary and is performed using real-time controls.

Examples of alternative sources of power include diesel generators or batteries. 
Load Shedding

  • Substitute Load (On-site Generation) – This constitutes having a flexible and extra source of energy for a facility that is not supplied from the grid. The created energy can be used steadily during the day or during a peak demand time. It can also be stored until the best time for demand reduction. Examples include solar photovoltaics, combined heat and power, and general waste recovery like biogas.

Demand Response Strategies in a Facility – An Example:

There are different types of technologies that are used to employ demand response strategies. Simple solutions include timers and occupancy sensors. More sophisticated solutions can be achieved by using smart devices that predict and react to real-time events. You can use these technologies alongside onsite energy generation and storage to maximize demand response plans.

Demand response strategies can be difficult to create and implement. Each one of them must first consider the needs of a given facility. Then you can determine how much energy consumption can realistically be reduced during a demand response event. Here is one example:

Systematic Demand Response

For this facility, the system is controlled using a building management system (BMS) and internet of things (IoT) technology. The system works as an optimization center that draws in internal and external information and uses it to deploy load management strategies during a DR event. The system utilizes information from an on-site smart meter, which communicates with the local utility grid, along with energy storage and on-site generation at the facility.

Looking at the picture above, you can see that each area in the facility has one or two ways to control load adjustment:

  • Occupancy Sensors detect the volume of people in an area and reduce load as needed. This can include dimming/turning off lights or reducing HVAC flow.
  • BMS Controls are transmitted and controlled through automatic system optimization sequencing. These controls will also determine if on-site power options can be used.
  • Manual Adjustments are made by personnel. These are usually made for critical operations to ensure safety and quality.

Residential recommendations

The residential sector has a much lower participation rate in demand response programs than the commercial or industrial sectors. There are many reasons for this. Businesses have a stronger incentive to control costs than residences. It affects their bottom line and reducing energy consumption contributes to it.

Businesses have a higher volume of energy consumption compared to residences and therefore create a much larger draw from the grid. Demand response programs for businesses are more cost-effective, so utility companies tend to place a larger focus on them.
Utility companies have developed some demand response programs and strategies for the residential sector, such as:

  • Direct Load Control (DLC) – Some of these programs allow the utility company to control consumption using one-way load control switches and thermostats. For customers, this is a “hands-free” approach to demand reduction because the utility company has control.
  • Demand Response Management Systems (DRMS) – These are more technologically advanced DLC systems that allow utilities to monitor and dispatch resources more effectively. They are designed to forecast load and revenue based on usage history by meter and on an aggregated basis. When implemented with newer two-way communicating thermostats and other devices, they can offer granular communications and real-time response on event performance.
  • Dynamic Pricing – Dynamic pricing is an alternative to DLC programs that use value-added offerings to different customer segments. They are used to encourage off-peak energy consumption. This can be done by using advanced meters that can record energy usage at small intervals.

About the Author

Dwayne Kula is President of LED Lighting Supply. On any given day, Dwayne is writing content for the site and helps manage the marketing initiatives that are on-going. He has a Software Engineering degree and still dabbles in writing software for the company as needed. When not working, he enjoys spending time with his family, working out, playing the occasional game of golf and exploring New England.

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