Commercial HVAC Equipment

Understanding your building’s demand charges can reduce your electrical spend

Monday, August 28 2017 9:48 AM
By Jon Goering

 Electric companies charge consumers for electricity based on two things: 1.) total monthly consumption, and 2.) demand.

Summer can be downright miserable in Kansas.

Especially when July and August highs climb into the upper 90s and the dew point slips above 70.

While uncomfortable to people, imagine how your building’s heating and cooling systems feel!

Excessive heat and humidity force a system to work harder and run more frequently in order to maintain comfort. The increased workload can send your building’s energy use through the roof.

But it doesn’t have to be that way.  

As a building owner, YOU can keep energy use in check by understanding how power companies charge you for electricity.

It’s not complicated, and with a solid understanding of how the process works, you can implement measures in your building to save money.

In this post, we’ll identify how electric companies charge for energy, discuss why they do so and highlight ways in which you can reduce consumption and save money.

And we’ve included Westar’s current electrical rates at the end.*

How to Think About Consumption & Demand Charges

Electric companies charge consumers for electricity based on two things: 1.) total monthly consumption, and 2.) demand.

Consumption charges reflect how much energy you used in a specified period of time, generally a month, measured in kilowatt-hours (kWh).

Demand charges, conversely, indicate the highest amount of power you used during the same billing period.

Electrical consumption is recorded in the same way your vehicle’s odometer records miles driven. Electrical demand resembles your vehicle’s speedometer, with the needle climbing as your energy use increases.

The difference, however, is that the needle remains at the highest kW level attained and maintained during a specified time interval (usually 15 minutes) within the billing period. It’s then reset to zero by a meter reader.

Most people understand consumption. You may have implemented tactics to reduce it, such as adding motion sensors to lighting or simply unplugging equipment at night.

But whatever you do, DON’T IGNORE DEMAND.

Here’s why: it can account for 25-50 percent of a commercial building’s utility bill. Yeah!

In Kansas, Westar Energy uses tariffs to bill its customers, which have been approved by the Kansas Corporation Commission (The KCC is Kansas’ public utility commission. It’s run by three people appointed by the governor with the state Senate's approval).

Westar explains: “The tariff, or rate schedule, applied depends on the type of customer (residential, commercial, or industrial), and for commercial and industrial customers their electricity demand,” according to a Westar spokesperson.

“Most commercial buildings will probably be on Small General Service, with larger buildings falling under Medium General Service (For SGS if a customer’s billing demand reaches or exceeds the 220kW 12-month average or 300kW in any one billing month, they will be reclassified as MGS. The MGS tariff states it is for any customer with a minimum Billing Demand greater than 200kW.”

The Demand Time Frame

Electric companies look at a specified amount of time when recording demand, as explained by Westar:

“The billing demand under both the Small General Service and Medium General Service tariffs is generally calculated using the highest 15-minute period of usage during the month (billing period).”

If you’re classified as Small General Service, Westar adds that your first 5 kW of billed demand is free. For Small General Service customers, Westar bills demand seasonally.

“June through September are billed at a different rate than October through May,” the Westar spokesperson says.

“For Medium General Service, rates include a demand ratchet. If the calculated billed demand is less than 50% of the highest summer billed demand (set in the previous billing months of June, July, August or September), the billed demand defaults to the 50%. Basically, there is a “floor” for the demand charge that is set at 50% of the previous billing months of June, July, August or September peak demand.”

You also can think about demand as an overhead expense. In anything we buy, the price we pay includes profit and all the costs involved in making the product available for purchase.

Likewise, with demand, commercial consumers pay for all the costs needed to ensure a ready supply of electricity.

Now that we understand consumption and demand charges and how Westar bills for the latter, let’s next look at why power companies implemented demand charges.

Commercial and industrial users – due to vast differences in their consumption and demand needs – are billed separately for these same charges, unlike residential customers who pay one rate for electricity.

The Reason Behind Demand Charges

Commercial and industrial users – due to vast differences in their consumption and demand needs – are billed separately for these same charges, unlike residential customers who pay one rate for electricity. That’s because some customers need large amounts of electricity all the time while others need it infrequently.

Since electricity cannot be stored and must be generated to meet each customer’s unique demand, electric companies must have the capacity to do so, and that can get expensive (think building/maintaining transformers, wires, substations, generating stations).

When the demand for electricity is greatest, electric companies must be able to answer the call.

So customers who need the most power during peak times pay for its availability.

Power companies utilize meters to record your building’s electrical consumption and demand.

With this in mind, let’s look at an example of how demand and consumption can influence an electric bill.

Comparing Consumption and Demand

Understanding how consumption and demand charges affect your electric bill can best be shown in this example highlighting two companies:

Electricity charge = $.05 kWh

Demand charge = $1.50

Example A: Asphalt Company runs a 10 megawatt (MW) load continuously for 100 hours.

10 MW x 100 hours = 1,000 megawatt hours (MWh)

1,000 MWh = 1,000,000 kWh

Demand = 10 MW = 10,000 kW

Consumption: 1,000,000 kWh x $.05/kWh = $50,000

Demand: 10,000 kW x $1.50/kW = $15,000

Total: $65,000

Example B: Bridge Company runs a 1 megawatt (MW) load continuously for 1,000 hours.

1 MW x 1,000 hours = 1,000 MWh

1,000 MWh = 1,000,000 kWh

Demand = 1 MW = 1,000 kW

Consumption: 1,000,000 kWh x $.05/kW = $50,000

Demand: 1,000 kW x $1.50/kW = $1500

Total: $51,500

As you can see, both companies consumed the same amount of electricity but at different intensities, which cost the Asphalt Company more. Reducing your demand charges begins with an understanding of your building and its utility use.

Now that we’ve looked at how demand and consumption can affect your electric bill, let’s look at ways to reduce your demand.

How to Reduce Your Demand Charges

For starters, one of the most obvious steps is to ensure your building’s envelope – roof, doors, windows, exterior – provides good thermal protection from the elements, thus eliminating the loss of warm or cool air.

Westar says many of its customers can see their energy activity with the help of an on-line dashboard.

“Looking at this information can help identify when energy use is the highest,” Westar says. “The business owner or manager can then take a look at what is happening in the business at that particular time and examine if some of the electricity use could be shifted to a time when use is lower.”

Westar suggests avoiding turning everything on all at once at the beginning of the day and “stagger the use of large pieces of equipment when you can, especially during the hottest hours of the summer.”

Other steps include:

  • Review your building’s energy data in real-time. You’ll see where and when your electrical demand is greatest, which will allow you to implement strategies to reduce those peaks. These changes should be reflected in your energy data in the future.


  • Manage your utility bills, and understand what they are telling you. Understanding how you are billed will allow you to focus on energy-savings tactics that will reap the biggest benefits. In addition, the practice may uncover potential errors on the part of your utility company.


  • Consider adding a thermal energy storage system to your heating and cooling system. Thermal systems can reduce energy costs by shifting equipment operation to lower-cost times of the day. Comfort cooling during the day relies on the thermal energy created overnight by your heating and cooling system when peak demand charges are lower.


Understanding how you are billed for electricity is a key first step in managing your building’s energy use.

Commercial and industrial buildings pay for both consumption and demand charges, with demand accounting for a significant percentage of your electric bill.

Implement intelligent strategies for your managing your building’s, and you will position yourself for real savings in the future.

Is energy use an issue in your building? Are you paying too much for demand? If you would like to discuss these questions in more detail with a commercial building expert, please contact Jonathon Goering at or call 316-265-9655.

Knipp Services works with commercial and industrial building owners to lower operational expenses and increase building comfort. We provide services that enable owners to have high-performance buildings. “Making Buildings Better” sums up the mission statement of Knipp Services.

You can follow us on FacebookLinkedInTwitterGoogle+YouTube, and 360Wichita.


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A Breakdown of Current Westar Electrical Charges*

As of August 2017, Westar charges Small and Medium General Service customers the following rates:

Current SGS:

Monthly service fee: $22.73/mo  

Energy Charge: 7.0417 cents/kWh for the first 1,200 kWh, then 5.1246 cents/kWh for all other kWh

Demand Charge:  $4.43/kW (over 5kW) October through May; $8.56/kW (over 5kW) June-September

Current MGS:

Monthly service fee: $100.99/mo

Energy Charge: 1.4772 cents/kWh October through May; 1.9452 cents/kWh June through September

Demand Charge:  $15.770063/kW


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