Understanding "Demand" and "Energy" Charges on Commercial Electric Bills

Electric utility companies charge shops a fee for the power you might use (or your peak power draw), as well as for the juice you actually consume. Here, shop owners describe what that arrangement can do to your utility bill's bottom line. February 18, 2007

We are in the process of upgrading to a larger dust system and I am trying to understand the demand charges on my electric bill. A dust collector is the most used tool in a shop. I have been doing some internet research and talking to the power company but still do not totally understand this.

Last year the shop was closed for a 3 week vacation and the power bill was the same with only 1 week working. Demand keeps going up, that I do know. Our power company does not have peak times and the rates are the same at any hour of the day. They tell me it is measured on 15 minute intervals and we are charged for peak usage. We have soft starters on all the large motors now except the DC and try not to start big motors at the same time. We try not to run bigger machines at the same time, but this can be counterproductive at times.

My question is - do the demand charges come from starting big motors (10 to 25 HP in our case) or the long time running of these motors? And is there a way to measure the demand cost of say a 15HP vs. 20HP? Iím sure the soft start helps. In the case of the dust collector we are considering a VFD so we can turn it down a little when using smaller machines. This is a $2,500 option and I wonder if the few times the DC is full power we might get nailed anyway.

Also, Iím looking at using 2 smaller HP fans in the same system. I saw a system in Germany that had a separate fan and pipe for each machine going to a large bag house. The initial cost to do that must be high. I am trying to weigh the additional costs against any power savings. Any
information is appreciated.

Forum Responses
(Business and Management Forum)
From contributor B:
Electric rates are typically charged on a demand and energy basis for larger commercial accounts. Residential meters only measure flow; they do not capture the usage at any one moment (or 15 minute interval) in your case.

The larger portion of most rates is the demand portion. In your case, they will look at the peak demand (which is the largest kW usage in any of the 15 minute periods). That amount will be multiplied by your demand charge to get the demand portion of the bill. The meter will also capture the flow based on integrating the 15 minute data. This will be a kW/hr number and will be multiplied by the energy portion of the rate.

Both of these numbers are added together for a total bill. The fact that the Demand portion is much higher (even more so in utilities with high fixed cost plants like nuclear or coal) could have been the cause of your bill being just as high in the month where you did not work 3 weeks. The Demand Charge portion of your bill will remain fairly constant as long as each day you work is fairly standard.

The demand portion is an attempt to capture the fixed costs of power plants while the energy portion is designed to capture the variable costs such as fuel. Residential rates have a Demand and Energy portion also but the residential meters do not capture the data so both rates are multiplied by the kW/hr number.

From contributor M:
On our electric bill for our smallish (10,000 ft) shop, the demand charge is the smaller of the demand and energy charge. The demand charge is the price paid for having the electricity available. The energy charge is the price paid for the electricity that is consumed. Our demand charge is ~20% to 25% of the total charge.

From contributor L:
I was going to find out about this a while back and spaced it off - thanks for reminding me. We have 800 amp 3 phase service and sometimes I'm sure are very close to maxing it out. The largest motor is 40hp and you can hear the wires rattle in the conduit when it starts. I priced slow start for it, expensive!

From the original questioner:
I talked to the Power Company again and they said we are billed demand for the highest kW 15 minute period during the month. I take that to mean it is clocking the use all the time and just takes the largest 15 minute period for the bill. He went on to say the quick spike caused by starting motors should not make this higher. That tells me soft start will not help with the demand bill.

Soft start does have some other benefits though. They are supposed to send out the lead meter reader to try to explain this better. Our power company says they charge demand because they have to be geared up to supply my peak demands. Even though most of the time we are not near that peak.

Contributor M, I think the rates vary with different utilities. Over the last year our demand was 60 to 70% of the total bill. Some utilities give rebates for soft starts and VFDs - ourís donít.

From contributor G:
Demand charges are unfortunately an unavoidable evil with a commercial 3 phase service. They are most detrimental to smaller shops and businesses that only operate one shift. I fall into this category.

In PA, I pay $9.96 per kW of demand. This is the total rate, as the utility company breaks it down between transmission, generation, distribution, and transition charges. Last month my peak demand was 55kW and the first 5kW are free. To find your demand charge on the bill, look for the numbers that are billed by kW or KVA as opposed to kWH to find your total rate.

Here is some general helpful info to determine what your demand is. 1HP is equal to 746 watts or .746kW. So for instance, a 10HP will have a demand of 7.5kW. This is the 100% load rate. In real life, most motors are not running at 100% load. My experience is that my motors average .5kW/HP.

Don't forget in summer months that air conditioning adds a huge demand and usage to your bill. I have a 15 ton unit which draws 22kW or 1.32kW per ton. So just turning on the AC for one day adds a little over $200 to my bill.

From contributor H:
I have a 5 person shop with 600A 3PH service. We still get billed at small commercial rate, not a demand and energy charge. The reason for this is that our peak demand level, as described by the others above, is below a threshold level (I believe it is 30 KW).

At one point they kicked me into the energy + demand level charge system, and I called and asked them what they suggested to bring the cost down. They suggested putting in load regulation controls to cut off circuits when overall demand gets to that 30kW level.

Now, of course you don't want to have your dust collector or edge bander to get cut off, but we did that to our electrical heaters, and you could do it to A/C. So, look around and see what could be interrupted. We put in the controls 4 years ago, and it cost about $2400.

From contributor C:
My shop is set up a bit different. We do not have access to grid power so we have a 45kW prime power propane genset, 400amps at 220V single phase, with solar power for tools under 30 amps. The initial cost was around 35K installed. Genset run time averages 6.5 hrs/day.

From the original questioner:
It looks like the soft starts are a waste of money for saving on demand, at least for 25HP and less. I think the power management software Ė meter and possibly a VDF on the dust collector might be the answer to try saving a few hundred every month.

The first 12 years we had 3 phase service there was no demand and the bill was always less than $100, even with a 40HP WBS. 4 years ago they lowered the minimum kW at which demand is charged and our bill has been $500 to $800 since. Itís still not as bad as some areas of the country, but its going up here. I have noticed the high months coincide with heavy millwork jobs where the moulder and sander might run for a couple hours straight.

I like the idea of a speedometer to tell us when were speeding. When voicing my concerns about power usage to dust collector vendors, a couple of them said to shut down gates to save power if we are just using a couple small machines. Even with a 20HP unit. In the past we have always kept a few gates open because I thought it was hard on the fan to restrict it.

From contributor G:
To the original questioner: You are correct about shutting too many gates on your dust collector. If you shut too many, you will actually cause your fan to draw more amperage resulting in a higher cost per hour to run. From my past experience, I would not restrict more than 40% of its capacity. Putting a VFD on a large fan on a dust collector is a very wise idea. EcoGates website has some very good info on the theory behind it. That being said, you can VFD on Ebay very cheap. Also the VFD has a soft start feature built in, so they make great controls for DC fans.

From contributor L:
When all gates are closed on a dust collector the fan is moving in a partial vacuum so there is less air to cause a drag. That doesn't seem like it would increase the motor hp required! I think I'll put an amp meter on my 15hp fan and see. I did it, result: all gates closed 20.4Amps, most gates open 26.3Amps. That's a 29% increase in motor effort.

From the original questioner:
Belfab is building our new dust system and their suggestion to save power in our case is to use 2 10HP fans on one bag house. This is costing and extra $2500 and a little more in pipe. The way our shop works only one fan will be running most of the time. They did not recommend VFDs on systems less than 50 HP. It would save power but change the engineering of air flow through the ducts. And have the danger of dust accumulating in the pipes and possible collapse. I do think that used carefully a VDF is still viable in a small shop dust system.

I asked them about closing gates to save power. They said every system is different and needs to be checked with an amp meter after installation. Generally they think closing more gates saves power but because of duct design this may not always be true. They recommend spending some time with the amp meter to see what the best balance is. They also said sometimes a gate slightly closed at the collector inlet makes the whole system work better.

Talking with the power company again they have no minimum demand threshold yet so we are charged for what is used at $15.29 per KW unit with 2 rate increases coming soon. We generally are between 28 and 35 units per month. I know the bad boy in our shop is the Kundig 3 head sander with 60 HP combined followed by the moulder. It is easy to use only 1 or 2 heads on the sander and a lot of jobs can be done with 2 heads. I did some quick calculations and if 3 heads are needed the labor savings will still be more than any power savings gained by shutting off one head. I will see what the new dust system and more care about what is running does for us before looking into the controls for demand reading. I still donít think rates are high enough to beat them with a gen-set.

I think every power utility is different and you need to see what options and rebates they offer. Ours is a struggling rural co-op that has to buy power from a larger utility. At this point they do not offer much to the industrial user. At least now I know why I write that check each month.