Demand charge

A demand charge is based on the maximum usage by a customer within a given time frame and often varies from month to month. Most commonly demand charges are applied to large commercial and industrial customers (in addition to customer and usage charges). Demand charges are designed to collect costs associated with the system capacity required by each customer including:

For electric customers:

• Transmission and distribution facilities installed to cover an electric customer’s highest demand
• Costs of generation capacity to cover an electric customer’s demand at the time the utility hits its overall peak demand (in jurisdictions where utilities have generation responsibilities)

For gas customers:

• Installed distribution facilities 
• Upstream firm pipeline and storage capacity used to deliver gas to meet a customer’s highest demand (for customers who are designated as firm) 

Some utilities base the demand charge on the customer’s highest demand in the billing month. Others use a rolling 12-month demand using the peak demand any time in the last 12 months. And for larger gas customers, demand charges are sometimes based on the amount of firm capacity for which the customer has contracted. 

In recent years, some jurisdictions have considered implementing demand charges for smaller customers such as small commercial and residential. This is now feasible given the increasing prevalence of smart meters that can measure this data. A demand charge is also a mechanism to address loss of energy charge revenues from customers who generate their own power such as owners of rooftop solar systems.