This is how electricity charges work. Because it is best for the utilities, the power grid and the environment to lessen our peak electrical demand, rate structures are designed to encourage electricity users to even out their use.
Basically, electricity is bought and sold by the Kilowatt-hour – the measure of electrical power. Extra charges to level our uses come in two basic types:
- A Demand Charge is a charge added to the bill that is based on the actual largest demand of the building during the billing period. If the largest instantaneous demand at any time was 4,000 kW, and a $0.05/Kw demand charge is used, $200 would be added to the bill.
- A Peak Load Charge is an extra charge based on the actual demand of the building at the time that the utility was experiencing its highest demand during the billing period. If the customer was using 350 kW at this moment, and a $0.40/kW demand charge was used, the charge would be $140.
Most utilities devise their own rate structures, and they are regulated by government.. In some places, the rate structure may simply charge more per kWh during some times of the day (mid-day, when demand is highest) than others; and maybe even less during the nighttime.
The utilities’ struggle to meet peak demand has both environmental and economic consequences. Their so-called “peaking plants”, generators used only when needed to meet peak loading, are their oldest and dirtiest plants; and the least efficient and most expensive to operate. Peak power is therefore more expensive and more environmentally damaging than off-peak power.
It is important to understand peak loading to appreciate its negative effects on the environment. It is important to understand peak demand charges to understand how to save money on an electric bill. Of course it is always best (and always the case) to save energy and money, but it is also possible to save money by using energy at carefully selected times, and benefit the environment in another way as well!