Electricity

Demand Charges Explained for Business Owners

By the findutilityrefunds.com team · Published October 14, 2026

Energy charges bill you for how much electricity you use over the month, in kilowatt-hours (kWh). Demand charges bill you for the highest rate at which you used it, in kilowatts (kW), typically measured over a short interval such as 15 minutes. Two businesses with identical monthly usage can pay very different amounts if one has sharper peaks.

Consumption versus demand

Think of kWh as the total distance a car travels and kW as its top speed. Southern California Edison describes demand and consumption as measuring two different aspects of energy use, with demand charges helping cover the cost of the equipment needed to deliver power at the level a customer needs.

Why utilities charge for demand

Utilities must keep transformers, lines, substations, and generation available to meet a customer's peak, even if that peak lasts only minutes. Roseville Electric explains that if a business requires 100 kW just once in a month, the utility still needs to be prepared to deliver that amount whenever it is needed.

How demand is measured

Many utilities record your average power draw in each short interval and bill on the highest one in the billing period. Eversource describes demand as the highest average kilowatts reached and maintained over a 15- to 30-minute interval. Some tariffs add rules such as time-of-use demand windows or minimum demand ratchets based on prior months.

Illustrative example — hypothetical numbers

Business A: total usage: 30,000 kWh
Business A: peak demand: 60 kW (steady load)
Business B: total usage: 30,000 kWh
Business B: peak demand: 150 kW (equipment started together)
Hypothetical demand rate: $15 per kW
Demand charge — A: $900
Demand charge — B: $2,250

Hypothetical figures for illustration only. Real rates, intervals, and rules vary by utility and rate schedule.

Tariff rules vary

The interval length, the price per kW, whether peak periods matter, and whether a ratchet applies all depend on your utility and rate schedule. Your utility's published tariff is the authority for your account.

What to look for on your bill

A line labeled demand, kW, or peak
The interval or time window used, if stated
Whether any demand charge is based on a prior month (a ratchet)
Your rate schedule name, so you can look up the tariff
How peak demand has trended over the past 12 months

Sources

General information only — not legal, tax, or professional advice. Rules and rates vary by utility and location.