Besides taxes and special fees, most commercial/industrial rate schedules bill for consumption in two ways: (1) the number of kilowatts required multiplied by the number of hours or “total consumption” measured in kWh, and (2) the maximum volume of kilowatts required to meet load demands at any point in time or “demand” measured in kW. Demand tends to be one of the most misunderstood items on the bill, but in order to understand it properly, we must also understand kWh.
Demand vs. Consumption
kWh represents the amount of energy required multiplied by the number of hours over which it is consumed. For example, a 1,000 watt (1 kW) heater running for one hour has used 1 kilowatt-hour or 1 kWh. If it runs for 24 hours, it will consume 24 kWh. A 15,000 watt heater would consume 15 kWh in one hour or 360 kWh in 24 hours. If each heater were on a separate meter with no other loads or power sources, the demand would be 1 kW on the first meter and 15 kW on the second – no matter how long they run.
In other words, total consumption adds up over time while demand refers to the volume of power required at any given point in time. Demand is what has the most direct impact on the capacity requirements of the power source and all the components (wire, transformers, breakers, etc.) that connect the source to your load. Higher demand requires higher delivery capacity.
A Plumbing Analogy
In plumbing terms, a typical 1 inch supply pipe to your house can deliver, under typical pressure, about 37 gallons of water per minute – assuming no flow restrictions imposed by faucets, etc.
If, however, you require 100 gallons per minute – even if only for 5 minutes each month – you would need a 2 inch supply pipe and the water company would have to be able to produce that much more water while maintaining pressure. Since it costs more to provide that level of pressure and flow (e.g., 2 inch pipe costs considerably more than 1 inch), they would charge extra to cover their costs.
Based on Peaks
Returning to the power discussion, most power companies calculate your demand charge based on your highest volume 15-minute period in the month. This might have very little to do with your monthly total consumption. It simply represents the capacity in wire size, transformer size and generation that the power company must provide to meet your high demand events or peak periods. That capacity must always be available, even if you only need it for one very brief period during the month, and since there is a real cost associated with increased capacity, the power company will charge you for it.
I’ve heard some complain that the power companies are double-dipping when they apply these charges. I would reiterate that it takes far less capacity to deliver 100 kWh in the form of 1 kW over 100 hours than in the form of 6,000 kW over one minute. If the only charge were for the kWh’s consumed, both of these examples would be charged the same amount, but the power company would have to increase the cost per kWh for everyone in order to cover their costs for the high demand example. This would clearly be unfair to the low demand customers, so keeping the cost per kWh low for everyone and charging customers an additional demand charge based on their specific peak demand really is more fair.
Getting a Handle On It.
We’ve seen businesses with high demand profiles where the demand portion of the power bill is as much as 65% of the total bill. In such cases, reducing the demand can have a much higher impact on overall energy costs than reducing consumption. But how do we do that?
In my next post, I’ll cover a some of the more common ways of reducing demand.