Ever stared at your electricity bill and wondered why it feels more like deciphering a secret code than paying for power? If you’re running a business or managing a commercial property, you’ve probably noticed two big line items: energy and demand charges. They sound similar, but they can impact your bottom line in very different ways, and understanding the difference is the first step to taking control of your costs.
Breaking Down Energy and Demand Charges
Let’s break down the confusion. Your electricity bill is usually made up of two major charges:
- Energy Charges: This is what most people expect, it's the total amount of electricity you use over the billing period, measured in kilowatt-hours (kWh). Think of this as the “mileage” on your electric meter: how much energy you used, regardless of when or how quickly you used it. Note: Energy charges reflect the quantity of electricity used, while supply rates refer to the price per kilowatt-hour you pay—often set by your supplier or utility. We dive into this more here on the blog.
- Demand Charges: This one trips up a lot of people. Demand charges are based on the highest rate you used electricity during your billing period. It’s not about how much you used overall, but about your “peak” usage—the most you demanded from the grid at any given time, measured in kilowatts (kW).
Why Do Demand Charges Exist?
Utilities need to be ready to supply enough electricity to meet everyone’s highest needs, even if those peaks only last a few minutes. That means they must invest enough generation and infrastructure to cover those spikes, not just the average usage. Demand charges help cover the cost of building and maintaining this capacity, so if your business has a short period where it uses a lot of power at once, you’ll see it reflected in your bill, even if your total monthly usage is low.
What Affects Each Charge?
Before breaking down what specifically affects demand charges vs. energy charges, it’s helpful to recognize that your electricity bill is shaped by a range of factors beyond just how much power you use. Utilities set rates to recover the costs of generating, transmitting, and distributing electricity, and these costs are influenced by things like fuel prices, infrastructure investments, weather patterns, and regulatory decisions. In addition to energy and demand charges, commercial bills often include other line items like delivery charges, capacity costs, and state surcharges. So, while energy and demand are the most controllable, they’re not the only contributors to your total bill.
Here’s how energy and demand charges typically show up—and what drives them:
Energy Charges (kWh):
- Total amount of electricity consumed over the month.
- Impacted by how long equipment runs, lighting, HVAC, etc.
- Can be influenced by time-of-use rates (higher during peak hours).
Demand Charges (kW):
- Highest “spike” in usage during any short interval (often 15 minutes).
- Impacted by starting many large machines at once or running lots of equipment simultaneously.
- Can be reduced by spreading out usage to avoid peak spikes.
Two companies can use the same total energy in a month, but have very different bills if one has a big demand spike. For example, a bakery that turns on all ovens and mixers at once for a morning rush will have a higher demand charge than a similar business that staggers equipment usage throughout the day.
Check out our blog series “How to Read Your Utility Bill” based on utilities in the Northeast.
What Have We Learned?
Energy charges are about how much you use, whereas demand charges are about the highest peak you use it at any time. Understanding the difference is the first step to understanding your bill. Next time you open your electricity bill, you’ll know exactly what you’re looking at—and where to focus if you want to save. If you’d like to learn more, Catalyst Power can help protect your business from market volatility with customized energy solutions. Contact our Energy Experts today to see how we can keep your costs stable and your operations running smoothly.
