Understanding Demand Charges
& How Solar Energy Reduces Them
Demand charges can represent 30-70% of your commercial electricity bill.
Learn how solar energy systems strategically reduce these costs.
What Are Demand Charges?
Understanding how utilities bill commercial customers for peak power usage
Energy Charges (kWh)
What you consume: Total electricity used over time, measured in kilowatt-hours (kWh). This is like the "miles driven" on your energy bill.
Demand Charges (kW)
Your peak usage: The highest 15-minute average power draw in a billing period, measured in kilowatts (kW). This is like paying for the "size of the road" you need.
Why It Matters
Utilities must maintain capacity to meet your peak demand, even if it only occurs for 15 minutes per month. You pay for this infrastructure investment through demand charges.
How Demand Charges Are Calculated
Understanding the different methods utilities use to assess peak demand
Common Assessment Methods
| Method | Description | Interval | Example |
|---|---|---|---|
|
Peak 15-Minute Demand
Most Common |
Utility records the highest 15-minute average power draw in kW for the month. This is the industry standard for C&I billing. | 15 minutes | If your facility peaks at 400 kW for just 15 minutes one day, you're billed for 400 kW for the entire month. |
| Peak 30-Minute Demand | Used by some co-ops or smaller utilities to smooth out short-term variability and provide more stable billing. | 30 minutes | Same principle as 15-minute but averaged over 30 minutes, which can result in slightly lower peaks. |
|
Coincident Peak Demand
Regional Variation |
Charges based on your contribution to the system-wide or feeder-wide peak, not just your individual peak. Encourages grid-conscious behavior. |
Varies
Monthly or seasonal system peak |
Common in Texas (ERCOT) and some Midwest ISOs. You're billed based on your usage during the grid's peak hour. |
| Time-of-Use (TOU) Demand | Different demand rates apply during on-peak vs. off-peak windows. Designed to incentivize load shifting to non-peak hours. |
Peak Hours
Typically 12 PM - 6 PM |
On-peak demand rate might be $25/kW while off-peak is only $8/kW, encouraging businesses to shift operations. |
|
Ratchet Clauses
Penalty Structure |
Utility charges a percentage (75-100%) of the highest demand seen in the past 12 months, even if current monthly usage is significantly lower. |
Annual
12-month lookback |
If you hit 500 kW in July (AC season), you may pay 75% × 500 kW = 375 kW minimum through June next year, even if winter demand is only 200 kW. |
Why 15 Minutes Matters
A single 15-minute spike—caused by starting multiple machines simultaneously, HVAC systems kicking on during a hot afternoon, or other equipment surges—can determine your entire month's demand charge. This makes strategic energy management and solar integration critical for cost control.
Solar's Strategic Advantage
Solar energy systems naturally produce peak output during typical commercial demand hours (10 AM - 4 PM). By directly offsetting grid draws during these critical windows, solar effectively "clips" peak demand before the 15-minute average is recorded, reducing or eliminating costly demand charges.
Sample Commercial Bill Breakdown
A typical 100 kW facility with moderate load factor
Monthly Bill Components
Total Monthly Bill:
$4,490
Bill Details
| Metric | Value |
|---|---|
| Monthly Energy Use | 22,400 kWh |
| Peak Demand | 87 kW |
| Load Factor | 34% (low) |
| Energy Rate | $0.096 / kWh |
| Demand Rate | $23.50 / kW |
| Annual Cost | $53,880 |
How Solar Energy Reduces Demand Charges
Strategic peak shaving through distributed solar generation
Peak Shaving Mechanism
1. Solar Generation During Peak Hours
Solar panels produce maximum output during mid-day hours (10 AM - 4 PM), which often coincides with commercial peak demand periods. This natural alignment reduces grid draws when demand charges are calculated.
2. Direct Load Offset
Solar energy directly powers your facility's operations, reducing the amount of electricity drawn from the grid. Every kW of solar production during peak periods directly reduces your demand charge exposure.
3. Consistent Production (Cloud-Free Days)
On clear days, solar provides predictable, consistent power that effectively "clips" your peak demand. A 60 kW system can reduce peak demand by 40-55 kW during optimal conditions.
4. Seasonal Alignment
Solar production peaks in summer months when cooling loads (and demand charges) are typically highest, providing maximum savings when they matter most.
Solar-Only System
60 kW solar array providing energy offset but variable demand reduction due to weather dependency.
Solar + Storage System
60 kW solar with 100 kWh battery storage providing consistent demand reduction and energy arbitrage.
Daily Energy Profile Comparison
How solar generation aligns with commercial demand patterns
Typical Commercial Facility (10 AM - 6 PM Operations)
Without Solar
Peak Grid Draw
2:00 PM
With Solar Only
Peak Grid Draw
Variable (clouds)
With Solar + Storage
Peak Grid Draw
Consistently capped
20-Year Financial Comparison
Lifecycle cost analysis including system investment, savings, and incentives
20-year utility costs
with 3.5% annual escalation
$130K savings
Energy offset only
$344K savings
Energy + Demand optimization
Investment Breakdown
| Component | Solar Only | Solar + Storage |
|---|---|---|
| System Cost | $105,000 | $180,000 |
| 30C Tax Credit (30%) | ($31,500) | ($54,000) |
| Net Investment | $73,500 | $126,000 |
| Annual Savings | $6,456 | $17,076 |
| Simple Payback | 11.4 years | 7.4 years |
| 20-Year ROI | 76% | 173% |
Additional Solar Benefits
Beyond demand charge reduction, solar provides multiple value streams
Rate Protection
Lock in energy costs for 25+ years, protecting against utility rate increases averaging 3-5% annually.
Sustainability Goals
Reduce carbon footprint by 15-30 tons CO₂ annually per 60 kW system, supporting ESG initiatives.
Property Value
Increase property value by 3-4% while reducing operating expenses, enhancing asset marketability.
Power Reliability
Battery storage provides backup power during outages, ensuring business continuity for critical operations.
Revenue Opportunities
Participate in demand response programs and grid services, generating additional revenue streams.
Brand Enhancement
Demonstrate environmental leadership and attract eco-conscious customers and employees.
Ready to Slash Your Demand Charges?
Our energy experts will analyze your utility bills and design a custom solar solution that maximizes demand charge reduction and ROI. Get your free analysis today.
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