Understanding Electric Demand

Demand vs. Energy Consumption: A Critical Distinction

Energy consumption measures how much electricity your building uses in total over a period of time — the cumulative kWh. Electric demand measures something different: how much power your building is drawing at any given moment — the instantaneous kW.

The distinction matters enormously because your utility bills you for both, independently. You can be a relatively modest consumer of total energy (kWh) but still face enormous demand charges if your building has a pattern of brief, intense power spikes.

Consider two hypothetical buildings, each consuming 10,000 kWh in a month. Building A draws a steady 400 kW throughout the day. Building B draws 200 kW most of the time but has a single 30-minute period where demand spikes to 1,200 kW. Both buildings pay the same energy charge. But Building B pays three times as much in demand charges — for a pattern that lasted less than 1% of the month.

The Peak 15-Minute Interval: The Rule That Changes Everything

Most commercial utility tariffs calculate the demand charge based on a single measurement: the highest average power demand recorded during any 15-minute interval within the billing period. Your utility's metering equipment samples your demand continuously, calculates the average over each 15-minute window, and records the maximum.

This means that a 15-minute event — a hot Monday morning when all your HVAC units start up simultaneously — can set your demand charge for 30 days. Demand rates vary widely by utility and rate class, typically ranging from $8 to $25 per kW per month in the US. For large commercial facilities, this translates to thousands or tens of thousands of dollars per month in demand charges.

Some utilities also use longer measurement intervals — 30 minutes in some tariffs — but the principle is the same: a single worst-case measurement period sets the monthly charge.

Demand Charges Explained: Why They Exist and How They Work

Demand charges exist because electric utility infrastructure must be sized to handle every customer's peak load, not their average load. When a utility builds a power plant, it must have enough capacity to serve all customers simultaneously at their maximum demand. The same logic applies to every transformer, transmission line, and distribution circuit in the grid.

That infrastructure is enormously expensive. A single high-voltage transmission line can cost millions of dollars per mile. A large combined-cycle power plant runs into the billions. Most of those costs are fixed — they do not depend on how much electricity is actually flowing through the system on any given day. They must be recovered from customers regardless.

The demand charge is the mechanism utilities use to allocate those fixed infrastructure costs among customers in proportion to each customer's contribution to the system peak. The customer who draws 1,000 kW at peak pays ten times as much in demand charges as the customer who draws 100 kW — because the first customer required ten times as much infrastructure to be built and maintained.

Coincident Peaks: The HVAC Problem

In commercial buildings, HVAC systems are typically the largest electrical loads — representing 40–60% of total building energy consumption. A building with 30 rooftop units, each drawing 15 kW, has 450 kW of HVAC capacity. If every unit is running continuously, the load is manageable and predictable.

The problem emerges from how HVAC equipment actually operates. All thermostats are set to the same general temperature range. When building temperatures drift above setpoint — say, after an overnight setback period, after a hot afternoon, or after a building has been unoccupied — all thermostats call for cooling at approximately the same time. Every unit starts simultaneously.

This is the coincident peak: a brief window where all loads turn on at the same moment, driving an enormous spike in measured demand. The spike may last only 15–20 minutes — just long enough to trigger the demand measurement that sets the month's demand charge. Then the units reach setpoint, some cycle off, and demand returns to normal.

The irony is that the building is not actually consuming more energy than usual — the total kWh for the day may be unremarkable. But the pattern of how that energy is consumed, concentrated into a brief coincident peak, creates a demand charge that can be dramatically higher than the average load would suggest.

The Grid Perspective: Why Utilities Penalize Peak Demand

From the utility's perspective, coincident peaks are not just a billing issue — they are a physical grid management challenge. When millions of buildings experience the same temperature conditions on a hot summer afternoon, they all call for cooling simultaneously. This drives up aggregate system demand to levels that approach or exceed the grid's rated capacity.

Grid operators — Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) — must procure enough generating capacity to serve load during these peak periods. They maintain reserve margins: additional generating capacity held available above expected peak load to handle unexpected outages or demand surges. Those reserves cost money even when they are never used.

Reducing building-level coincident peaks through demand management does not just benefit individual building owners — it reduces the aggregate system peak that grid operators must plan for, potentially deferring the need for new power plants and transmission infrastructure.

The Climate Perspective: Peaker Plants and Peak Demand

Grid peaks create a specific environmental challenge: the generating resources that serve them are typically the least efficient and highest-emitting in the fleet.

During normal operating hours, modern combined-cycle natural gas plants and renewable sources serve most of the load. These are efficient, lower-emitting units that run continuously. But during peak demand periods — hot summer afternoons, extreme cold events — these baseload resources are already running at full capacity. Grid operators must call on "peaker plants" to serve the incremental demand.

Peaker plants are simple-cycle gas turbines or diesel generators that start quickly but operate at much lower efficiency than baseload resources. They also tend to be located in or near population centers, disproportionately impacting communities already burdened with industrial pollution. The carbon intensity of electricity consumed during peak periods is significantly higher than the average grid emissions factor.

When DemandQ reduces peak demand in a commercial building, the carbon reduction benefit is greater than simply reducing total kWh consumption by an equivalent amount. Each kW of peak demand avoided reduces reliance on the least-clean generation resources on the grid.