Understanding Demand Charges: A Practical Guide for California Businesses
Updated
November 15, 2024
7:00
min read
About Author
Alex has spent his entire career, in solar energy. In his current role at SunGreen, Alex oversees the design and optimization of systems to ensure they fit customer needs and maximize return on investment. Alex loves the technical aspects of solar energy production and is also well-versed in Federal, state, and utility-level policies regarding renewable energy. Alex is also a regular panel member in various industry webinars.
Find out how Sungreen can help your company avoid high demand charges.
There’s a critical part of a commercial electric bill in California that a lot of folks overlook until they see that bottom line. Demand charges can make up a big chunk of your electricity costs, and they’re worth understanding if you want to manage them effectively. Here’s a straightforward look at what demand charges are, how they work, and some practical ways to keep them in check.
What Are Demand Charges?
Simply put, demand charges are fees for the rate at which you use electricity, not just the amount. When a business draws a lot of power quickly, utilities charge extra for that peak rate, measured in kilowatts (kW). So if you fire up all your equipment at once, you could get hit with a hefty demand charge even if your overall electricity usage is moderate.
In California, demand charges are designed to ensure utilities can handle peak demand. They’re like a “speeding ticket” for energy use—the faster and harder you “drive” your energy use, the higher the bill.
Key takeaways from this article
Demand Charges Are Based on Peak Usage: Unlike standard energy charges, demand charges are calculated based on the highest rate of electricity use during any 15-minute interval in the entire billing period. This means even a single spike in usage can lead to high demand charges and significantly drive up the cost of your utility bill.
Strategies to Manage Demand Charges: Businesses can lower demand charges by managing load (staggering equipment startup), selecting optimal rate schedules, using solar and battery storage, and shifting operations outside of peak hours.
Battery Storage Can Help: Adding battery storage allows businesses to smooth out power usage during peak times by discharging stored energy, helping to reduce demand charges significantly.
Analyzing Energy Data Is Key: Reviewing 15-minute interval data helps identify when and why demand spikes occur, allowing businesses to make targeted changes to lower their demand charges effectively.
Why Are Demand Charges Important?
Demand charges are especially significant for businesses that have energy peaks, like factories running heavy equipment or a cold storage facility keeping perishables cool. For example, data centers and production lines might draw power around the clock, and some places like churches only spike on weekends. Either way, these spikes are used to calculate your demand charges.
The reason demand charges have become such a major part of the bill for businesses is that California’s utilities need to ensure they can handle peak loads, especially during high-demand times like 4 p.m. to 9 p.m. when solar power is fading. These charges help utilities balance supply, but they also increase costs for businesses that hit those high peaks.
How Are Demand Charges Calculated?
Utilities monitor your power demand in 15-minute intervals throughout the day. If you use a lot of electricity in a short window, say once a month for an hour, that can become your peak usage for the month. Demand Charges are calculated by factoring in your peak usage for the month. So imagine turning on your HVAC, machinery, and lighting all at once first thing in the morning—that 15-minute interval will be costly if it’s your highest usage rate for the month.
Some businesses don’t know their demand charges are so high because they’ve never looked closely at their interval data. We start by reviewing that 12-month interval data to spot those peaks and find patterns in your energy use. Once we see what’s driving your demand spikes, we can suggest ways to smooth them out.
Practical Strategies to Reduce Demand Charges in Your Bill
1. Spread Out Your Power Loads
One simple way to cut demand charges is to avoid big surges by staggering when equipment powers up. Think of it like a rolling start for your business’s energy use. Instead of switching everything on at once, try a staggered schedule for high-draw equipment. This strategy alone can reduce your peak demand rate significantly.
2. Optimize Your Rate Schedule
Different utility rate schedules might be a better fit, depending on your business. In the Southern California Edison area, for instance, there’s “Option D” with high demand charges and low energy charges, which suits businesses with steady energy use. Then there’s “Option E,” which flips this by charging higher energy rates but lower demand fees—ideal for businesses with occasional peaks, like churches.
Switching to a more fitting rate schedule can save a lot, but it’s not always obvious. Some businesses are on default plans that may not make sense for them. We can help look at your options and pick a rate plan that keeps demand charges in check. Also, adding solar can help you make it easier to change your rate plan to one best suited to your business.
3. Investing in Solar Energy Systems opens the door to lower rates
Solar energy systems are a great way to reduce overall energy costs by offsetting some of your electricity use and smoothing out your power consumption during daylight hours. Solar-generated power can reduce your reliance on grid electricity, making it possible to switch to rate schedules like Option E, which features lower demand charges. However, solar can’t eliminate demand charges because of fluctuations in its output—clouds, shading, and seasonal changes all impact solar efficiency. For that reason, solar alone may not fully alleviate peak usage spikes. Pairing solar with a battery storage system can provide a more reliable solution, allowing you to tap into stored energy during high-demand moments and further reduce demand charges.
Solar can offset a lot of your energy charges. However, it’s worth noting that solar alone won’t address demand charges. Since solar output varies with the sun’s intensity, it’s hard to rely on it for those peak demand moments. Still, solar can reduce overall energy use, which helps you save, and pairing it with a battery can go even further.
4. Add Battery Storage to Smooth Out Peaks
Battery storage can be a game-changer if you’re looking to control demand charges. A battery setup discharges during peak times, smoothing out your demand spikes. In effect, it sets a ceiling on your demand rate, so you don’t hit the utility’s highest price tiers.
At SunGreen, we’ve seen businesses save significantly by pairing solar with battery storage. For example, a battery lets you use your solar power when rates are highest and avoid demand charges altogether during those periods. It’s like having a backup generator that knows when to kick in and reduce your peak load.
5. Shift Operations Outside of Peak Demand Periods
One low-cost option is to shift certain activities to off-peak hours. Demand charges typically spike from 4 p.m. to 9 p.m., so if you can move tasks outside of those hours, it’ll show up as savings on your bill.
Not all businesses can send employees home early or shift production times, but for those that can, this can be an easy way to reduce costs. For instance, if you’ve got a factory with multiple shifts, starting the evening shift after 9 p.m. could help lower demand charges.
Overcoming Common Hurdles
Reducing demand charges isn’t always easy. High upfront costs, difficulty tracking demand, and operational challenges can all get in the way. Here’s how we approach these:
1. Analyze Your 15-Minute Data:
To get a grip on demand charges, SunGreen reviews interval data. We look for patterns in your energy use—when peaks happen and what’s driving them.
2. Check for Feasible Upgrades:
Whether it’s batteries, load management tech, or efficient lighting, we assess what’ll pay off fastest and give you the best return on investment.
3. Guide You Through the Options:
We know the utility rate schedules and rebate programs, so we can recommend the best course of action.
Solar Atmospheres, a Real-World Success Story.
One of our clients, a vacuum heat treatment facility, is a perfect example. This place uses massive amounts of energy and runs high-wattage equipment all day. We installed solar across their rooftop, an extension on the roof for more panels and a big battery system to meet their demand needs. This facility now uses its battery to keep demand charges low by discharging power during peak times, saving them thousands of dollars each year.
They also have a live demand screen in the factory, so everyone can see in real-time if they’re about to hit a peak demand rate. That awareness alone makes a huge difference. It’s all about being smart with energy use and having the right systems in place.
First Steps Toward Lowering Demand Charges
If you want to cut demand charges, start by understanding your energy patterns. SunGreen requests 12 months of interval data from clients to help identify high-use periods. That’s an Excel file with over 35,000 lines of data that we plug into our software programs. This data lets us pinpoint what’s driving demand and how to address it.
Once we have that, we can recommend solar, batteries, or operational shifts based on your needs. Whether you’re a manufacturing plant, a warehouse, or a retail business, there’s likely a solution that’ll fit your setup and make a big difference in your costs.
Want a Demand Charge Analysis? Let’s Chat
Ready to take the next step? Request a consultation with our team today. We’ll review your data, discuss your options, and show you how to reduce demand charges tailored to your business. You can also call or email if you want to talk through any questions.
Demand charges don’t have to be a mystery. With the right plan, you can save significantly and make your business’s energy costs more manageable.
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