What Is Maximum Demand Charges? Making Sense of Them

If you are a large industrial or commercial utility customer, chances are that a big portion of your utility bill is made up of demand charges.

What Is Maximum Demand Charges? Making Sense of Them

The maximum demand charges would be the maximum fee demand for a particular type of electricity generation or delivery. It is usually calculated as the maximum demand forecast for the next year and readjusted annually to take account of any changes in demand. 

If you are a large industrial or commercial utility customer, it’s very likely that a big portion of your utility bill is made up of demand charges. It’s, thus, important to read more about this fee to fully understand how demand charges are calculated for your business.

In this post, we’ll start you off with an overview of demand charges, how maximum demand charges work, why they exist, and why you should care about them. We'll also talk about what you can do to reduce your demand charges to save money on your electricity bills.

Let’s dive in…


What Are Demand Charges?


According to the New York State Energy Research and Development Authority (NYSERDA), the demand charge is a monthly fee you pay as part of the cost of maintaining the electric utility's infrastructure required to deliver electricity (or other forms of energy) to your building.

“On each month’s bill, the demand charge amount is based on how high your energy use measured in kilowatts (kW) peaked during the month. So, the higher your peak usage in kW, the higher your demand charge is going to be,” says NYSERDA.


How Does Maximum Demand Charges Work?


More energy and electricity utility companies in developed countries are introducing new pricing schemes to better reflect the true cost of delivering power. 

One such scheme in the UK is called "maximum demand charges." These charges are based on the highest rate of electricity that your home or property uses at any one time.

Many people have experienced a large jump in their electric bills with this new pricing scheme. But there are measures you can take to reduce these costs—more on that later. 


What's the Purpose of a Maximum Demand Charge?


Maximum demand charges are designed to charge customers for the highest possible rate they use in a given billing period. This is typically done by looking at peak usage rates and then charging the customer based on that usage.

The maximum demand charge is the most expensive charge on your electric bill. It is based on the highest amount of power that your home or business uses in a given timeframe.

If you use more power during periods of high demand, you are more likely to be charged a higher maximum demand charge.


How Is the Maximum Demand Charge Calculated?


For commercial installations, the maximum demand charge is calculated by multiplying the peak demand in kilowatts (kW) by a tariff per kW. 

In most cases, the demand charge has two components: fixed and incremental components. The fixed component is equal to the maximum demand in kW multiplied by a tariff per kW.

In contrast, the incremental component varies depending on how peaky or flat your electricity usage pattern is during any given billing period.


How Does the Maximum Demand Charge Affect Homes and Commercial Installations?


Your electricity service provider will determine your historical usage and set a maximum demand charge based on that. This charge is designed to cover the cost of providing power when you use the most electricity in a given period. If they have this charge, they can provide you with energy during high-usage times without undue financial burden.

But what about those days when you don't use as much electricity? That's where variable consumption charges come into play!

Variable consumption charges are based on how much energy you actually use (in kWh), and these rates are typically lower than your maximum demand charges. If you only use a little bit of energy, your variable consumption charge will be lower than it would be otherwise.


How Do You Keep Your Maximum Demand Charges Low and Variable Consumption Charges Reasonable?


There are ways you can keep your maximum demand and variable consumption charges reasonable, including installing a demand meter to help you monitor your electricity usage.

Adjust your usage monthly to avoid high demand tariff charges and save money on your bills.

Also avoid running lots of electrical appliances at once to avoid a high demand peak and save on your consumption charges.

You may also benefit from switching electricity suppliers. There are many suppliers operating in the UK, US, and other countries, so there is no shortage of options. 


Are there Different Types of Maximum Demand Charges?


There may be different types of demand charges in your country that could be constantly evolving. It helps to keep tabs on and learn about the different types of maximum demand charges that exist in your area to better handle them and save on your utility bills. 

Some examples of different types of maximum demand charges include:


1. Peak Demand Charges


Peak demand charges are energy charges meant to encourage people to use less energy during periods of peak demand. 

Peak demand charges only apply if you have a meter that can measure peak power usage. 


2. Time of Use Charges


With more change in rates, consumers are now charged based on the time of use. This means there is no longer a rate for every hour of the day.


3. Energy Charge Per kWh


Power companies in the UK charge for a unit of electricity known as a kWh. The kWh is the standard measure for how much energy the power company supplies to your home.


In Conclusion


The maximum demand charge is a pricing structure for electricity that charges customers more when they use more energy. The idea behind this is that the higher the demand on the power grid, the higher the cost of generating power. This type of pricing structure encourages people to use less electricity when there is a high demand on the grid.

Vergis Eva is an experienced blogger and content writer covering many topics for different blogs and websites.