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Load Factor and Commercial Demand Charges – How to Lower Your Business Electricity Bill

You shopped for the lowest rate per kWh for your business. So what’s this other charge on your bill?

Commercial customers often pay a commercial electricity demand charge in addition to the cost per kWh. And depending on the type of business you run, it may be a substantial.

Read on to find out what is a demand charge, typical load factor by type of business, how your load factor impacts your demand, and most importantly, how to reduce your demand charges.

What is a Demand Charge?

Most commercial customers have two charges on their bill driven by their electricity usage:

  • Electricity Charges: This is the energy charge for the electricity you use (kWh) multiplied by your electricity price ($/kWh).
  • Demand Charges: This is the energy charge for the amount of electrical capacity you need. It’s the maximum amount of power (kW) used during your highest usage 15 minute interval, multiplied by the local utility’s demand charge ($/kW). 

Your electricity charges are the cost per kWh for electricity. That’s something you can shop for on ElectricityPlans.com.

Your demand charges come directly from your Transmission and Distribution Utility (TDU). You will usually see those demand charges as a direct pass through line item on your commercial electricity bill.

Your demand charges are based on the maximum amount of electricity your business uses at a point in time, also known as your coincident peak demand.

You can think of it this way:

Your Peak Demand Level: When the electrical system grid was at it’s most stressed-out level, how much of the stress did your business cause?

How Does Peak Demand Impact my Electricity Bill?

Demand charges can make up 20-50% of a commercial customer’s bill, depending on your electricity usage pattern.

Your bill will typically show two demand numbers, even though you are only billed on one of them. One is your actual KW demand for the month. The other is your peak demand. Your peak demand is set annually based on your usage in the 15 minute interval period when the overall grid had the highest demand.

Once your peak demand is established, it will stay that way for 12 months … unless you reach a new peak. Because of this, you are typically billed based on the higher of the annual peak or your current month’s peak demand.

Oh. And here’s the other catch. Your peak demand is set each year based on the highest 4 usage intervals in the summer, called coincident peak demand days. And those peak demand days aren’t known until they actually happen. (More on that below.)

And as an added bonus? Having high demand / low load factor will also increase your cost per kWh from your supplier.

Why Do Utilities Charge Demand Charges?

Demand charges are fees charged by the utility company to offset the cost of having energy available to their customers at all times.

Utility companies need to ensure that power is always available when you flip the switch. When power usage is consistent, it’s easy for utilities to manage the transmission and distribution of power.

But utilities have to plan for the highest possible usage. They need to be “always ready” for when usage spikes. The cost of being “always ready” is the price of demand.

Analogies for Understanding Electricity Demand Charges

Since this is a pretty complex topic, here are some analogies that explain electricity demand charges:

First: The Enterprise. We like the analogy of Captain Kirk on the bridge asking for more power. “I’m giving her all she’s got Captain.” Well, we want more. And we’ll pay for it. So, Scotty, make sure you have more power available for whenever I need more.

Second: Water Flow. The more common analogy that explains electricity demand is water. Both buckets are going to be filled. But one bucket is using a bigger spigot and will get there faster. Their demand for water is higher, and thus more costly.

Source: Horry Electric Cooperative

Third: Fast vs. Slow Car. Our last analogy for explaining demand uses a car. Any car can take you that 100 mile journey. But if you want to get there fast, you may want to pay more for the sports car. That’s your demand for speed… and you’ll pay for it in your infrastructure and your gas consumption.

Source: Horry Electric Cooperative

Ok, one more, that’s very specific to energy. Imagine you are a retail store with set hours, and most of your electricity usage is for HVAC and lights. Now imagine you are a manufacturing business. You turn on and off machines during the day as you are producing widgets. You have a very different demand on the grid than a retail store.

How is My Peak Load Established: 4CP and PLC

Your peak demand measurement and the demand rate tariff you pay ($/kW) is based on your Coincident Peak Demand.

Your Coincident Peak Demand is your actual demand on the days when the entire grid system hit its highest level of demand. That measurement then impacts your bill for the next calendar year.

Here’s the catch — no one knows when those days will be.

If you are in the PJM Market area (Illinois, Ohio, New Jersey, Pennsylvania and others) the Coincident Peak Demand is called the Peak Load Contribution (PLC). PJM looks back at the 5 overall highest peak hours of demand during the summer, from June to September. PJM assigns each customer a PLC of 0 to 100 based on their usage during those 5 hours, vs. the overall system usage. Accounts with a higher PLC have more impact on the grid, and will pay more.

In Texas (ERCOT market area) your peak demand charge is based on your peak usage during the Four Coincident Peaks, or 4CP. These are the 4 hours with the highest usage during each month of summer, June – September. (One hour per each month.)

Luckily for business owners, there are alerts that warn you of the opportunity for a coincident peak event.

  • If you are a large commercial customer, you can subscribe to 4CP Alerts from your retail energy supplier or from the utility (if you are in a regulated market). Quant jocks monitor the weather, grid projections, supply and demand to predict when a system peak usage event will occur. They will give you advance warning so you can take high usage devices offline, or stagger your load.
  • If you are a small commercial customer, monitor the web site for the local grid operator in your area (ERCOT, MISO, PJM). They will issue alerts for high usage days. These are also the days for a possible coincident peak event.

How Does Load Factor Impact My Electricity Bill?

Load factor isn’t something you see on your bill but it is the core behind the price you pay for electricity, and your demand charges.

Load factor compares average demand to peak (highest) demand.

  • If you use power consistently (high load factor) you are a low demand customer. Your demand on the grid is low and your demand charges will be a smaller portion of your bill.
  • If you use a lot of power over a short period of time (low load factor), you are a high demand customer. Your impact on the grid is higher. You will pay for that impact through your demand charges.

Your load factor will impact your electricity bill in two ways:

First, your load factor will impact your electricity price ($/kWh). Electricity providers prefer high load factor, low demand customers. These are the types of customers that use a consistent, predictable amount of power. Comparatively speaking, companies with high load factor are easier for electricity providers to buy and schedule power for.

Second, your load factor will impact your demand charges ($/KW). Your load factor may also impact the tariff class that your business is placed in (i.e. the rate you will pay per kW demand.)

How Do I Calculate Electrical Demand or Power Load Factor?

Load factor is the ratio of total energy (KWh) used in the billing period divided by the possible total energy used within the period, if used at the peak demand (KW) during the entire period.

Demand Load Factor = KWh/KW/hours in the period

What???

You can calculate it by dividing average demand by peak demand for the billing period.

But since math is hard, and because you won’t find average demand on your bill, here are two examples of how to calculate load factor

Load Factor Calculation Examples and Formula

Here are two ways to calculate Load Factor. The first method assumes you just have one bill handy. The second method assumes you know annual usage.

Method 1: Calculating Load Factor with Monthly Bill

For our sample business, we’ll take a look at a bill. The bill shows that they used 14,000 kWh during the month with a peak demand of 25 kW.

First we’ll calculate average demand for the month:

14,000 kWh / 720 hours in a month = 19.44 KW

Then, calculate the load factor by dividing average demand by peak demand:

19.44kW / 25kW = .77 or 77%

Method 2: Calculating Load Factor with Annual Usage

Using a full year of data is the preferred method for calculating load factor.

In this case, you don’t have to calculate average demand.

This method assumes that your peak demand is your consistent demand number throughout the year:

Annual Usage in kWh / (Peak Demand * 8760 hours in the year)

In the example business above:

168,000 kWh annual usage / (25kW * 8760 hours) = .77 or 77%

What is a Typical Load Factor for a Business?

Load factors will vary by business, but below are average load factors by type of business:

Industry TypeAverage Load FactorElectrical Load Factor CategoryElectricity Demand Category
Education75-80%HighLow
Grocery75-80%HighLow
Health Care55-65%MediumMedium - Low
Retail Store50-60%MediumMedium
Hotel/Motel45-60%LowHigh
Restaurant50-55%LowHigh
Office45-55%LowHigh
Manufacturing35-50%LowHigh
House of Worship25-35%LowHigh
  • If your load factor ratio is above 75% your electrical usage is reasonably efficient.
  • If the load factor is below 50%, you have periods of very high usage (demand) and a low utilization rate.
  • If your load factor is below 40% you are considered to have high demand. If you fit into this category, demand charges will have a significant impact on your monthly bill. You should take action to lower your demand charges.

TIP: Switching your retail energy supplier won’t change your load factor or your demand charges But you may be able to get a more competitive per kWh rate on your electricity. Shop online with ElectricityPlans.com to get the best business electricity rate.

How to Reduce Commercial Electricity Demand Charges

Here are some ways you can reduce your commercial electricity demand charges:

  • If you are starting a new business and moving in to the facility, make sure you request a move-in when you start service. That will reset your peak demand calculation.
  • If you are building out a new space, make sure construction is being done with a temp meter in place. When the permanent meter is installed, request a move-in for new service. That will ensure your peak demand will be based on your actual usage pattern.
  • Stagger the testing or operation of any equipment (HVAC/motors/pumps). If all equipment is tested or operated at one time, this may re-set your peak demand for the entire year.
  • Gain access to your smart meter data to identify when you use the most power during the day (especially June – September). Work to reduce your power usage during those times, to smooth your demand. In Texas, you can download that through SmartMeterTexas.
  • Reduce the amount of equipment or A/C units running at the same time.
  • If you use heavy machinery in your business, consider a staged start-up. Turn on one piece of equipment at a time (maybe one every 20 minutes). You can also create a schedule to ensure that all equipment isn’t operating simultaneously.

Resetting Your Meter Load Factor – Move-In

Your meter will be designated as high, medium or low load factor. That will determine the tariff your TDU bills you on.

If you are moving in to a new facility, you don’t have to “inherit” the previous occupant’s peak load measurement.

Completing a move-in in Texas, or setting up a new account in other markets, will trigger a review of your demand tariff and peak demand.

Additional Resources:

Hopefully this article has helped you better understand demand charges, load factor, coincident peak demand days, and how to lower your demand charges. These resources have additional information.

https://www.electronicshub.org/what-is-load-factor/

https://www.csu.org/CSUDocuments/hiddencostslowloadfactor.pdf

http://www.demandcharge.com/Web_Pages/Articles/Electrical_Load_Factor.html