Demand Charges Versus Energy Charges
We saw in an earlier part of this lesson the difference between energy and power. For our electricity provider, our Energy use is how much kWh we use. But we can also talk about the rate at which we use electricity, which is Power.
For most homes, you only pay for energy (kWh). But businesses and some large facilities also pay a demand charge based on their highest power draw during the billing period. Why? Because the utility must build infrastructure (transformers, wires) sized for your peak demand not your average use.
Take for instance this example commercial bill. It is also from PPL in June 2024, however it is much bigger than what most homeowners would pay for one month.
PPL bill with demand charge: Commercial Bill
On the Bill we can see the following:
- Total Energy Used - 598,000 kWh
- Peak Demand - 1,095 kW
- Energy Charge
- Demand Charge - $2.54701/ kW
- Days in Billing Cycle - 2
- Supply Charge $ - $0.00
- Delivery Charge - $3,133.19
In this case, the energy charge is negligible, but the customer paid a lot in their demand charge. This customer could reduce their bill by reducing their electricity use when their draw is the highest. Why? Because the utility must build the infrastructure (wires and transformers) to account for your peak demand, not the average usage.
Time-of-Use Billing:
Some utility bills use time-of-use (TOU) pricing, which charges different rates depending on the time of day you consume electricity—similar to "surge pricing" for rideshares or toll roads. During peak periods (typically 4 PM–9 PM on weekdays), rates are highest because demand on the grid spikes as people return home, cook dinner, and turn on appliances. During off-peak hours (usually 10 PM–6 AM), rates drop significantly due to much lower overall demand.
Why Peak Times Cost More
Electricity must be generated the instant it's used. When millions of households draw power simultaneously during evening hours, utilities must activate expensive "peaker" power plants to meet demand. TOU pricing reflects this real cost—and incentivizes customers to shift flexible loads to times when the grid has excess capacity.
Sample TOU Rate Structure
Hypothetical residential plan (rates vary by utility)
Smart Shifts That Save Money
Because peak rates can be 2 to 3 times higher than off-peak rates, small timing changes yield real savings:
Where TOU Is Common
TOU billing is increasingly standard in high-demand regions like California, Arizona, and parts of the Northeast—especially for customers with solar panels or electric vehicles. Always check your utility's specific peak windows, as they can shift seasonally (e.g., summer afternoons may become peak due to air conditioning demand).