Electric utilities use their rates to pay for costs and make a profit. They price different aspects of energy use to both earn revenue and send “price signals”. On one hand they want to allocate costs based on the behavior of their customers. On the other hand they employ price signals to influence that behavior. Most utilities have a mandate to strive for “least cost” operation of the grid for the benefit of all customers. The two most common price signals are “Energy Charges” ($/kWh) and “Demand Charges” ($/kW).

Energy Charges are applied to every kWh of energy consumed in a billing period. These are what you see on residential electric bills. On commercial electric bills you see this same charge, but at a lower rate because the majority of cost is applied in the Demand Charges.

Demand Charges are applied to the highest average power consumption (kW) over a specified period of time (typically 15 minutes). These charges often comprise 60% or more of total commercial costs.  The “billable demand peak” you see on a given day’s demand charge chart shows the highest moving-average power draw for that day.  The highest value of this calculation over a billing period sets the demand charge on the bill.  A spike in power use for just 15 minutes can incur a large expense even if power use is low for the rest of the month.

Why do utilities separate these costs? Because how much energy you use and how quickly you use it incur different costs on the grid.

Using a constant amount of power over time puts a constant load on power plants, transmission and distribution lines, etc. A utility will consequently take full advantage of the cost of building that infrastructure and over time most of the cost is driven by the costs of fuel, maintenance, etc. Energy charges cover these costs.

Using a lot of power intermittently forces utilities to build enough infrastructure to service that load, but much of the time that infrastructure is not fully used. Demand charges cover that cost, without penalizing customers who use power more consistently.

The figure below illustrates this logic. Both curves represent the same amount of energy, but the higher power draw on the left would require twice the grid infrastructure to serve than the power draw on the right.

As an example, the most current Xcel Energy Colorado commercial rates are typically posted here: https://www.xcelenergy.com/staticfiles/xe/Regulatory/COBusRates.pdf  However, this link may get broken over time as Xcel updates their web site.