As small businesses shop for a third-party supplier, they should compare two separate charges: one for the amount of energy they consume and another for demand. Most of us think of electric bills in terms of the total amount of electricity used. The more power we use in a month, the more we expect to pay. The less we use, the less we expect to pay. But, unlike residential customers, most businesses pay for more than just the amount of kilowatt-hours (kwh) they consume. Most businesses also pay for demand. Demand is measured in kilowatts (kw) and is the rate at which electricity is delivered at a given instant or averaged over some period of time.
For example, suppose you turn on ten, 100-watt bulbs. They "demand" a total of one kilowatt (10 bulbs times 100 watts = 1,000 watts = one kilowatt). Fifteen minutes later they have used one-fourth of a kilowatt-hour (one kilowatt times one-quarter of an hour). However, their demand remains one kilowatt. If the lights stay on for one hour, the consumption would be one kilowatt-hour. But, the demand still would be one kilowatt.
If everyone used a steady flow of electricity throughout the day, every day of the year, there would be fewer challenges for the generation supplier, but this isn't the case. Electricity use rises and falls throughout the day.
For example, two customers each use 1,200 kilowatt-hours in a day. One has a steady demand of 50 kilowatts (50 kilowatts x 24 hours = 1,200 kilowatt-hours). The supplier needs 50 kilowatts of generating capacity to serve the customer.
The second customer has a demand of 30 kilowatts for 23 hours and 510 kilowatts for one hour. Total electricity used is 1,200 kilowatt-hours (30 kilowatts x 23 hours + 510 kilowatts x 1 hour = 1,200 kilowatt-hours). However, now the supplier must have 510 kilowatts of generating capacity standing by to serve this customer.
Demand charges assign to each customer the cost of the power supplies needed to satisfy the maximum demand of that customer. In choosing a third-party supplier, a business should compare demand charges and kilowatt-hour charges, and must consider what the total electric bill will be. A total bill includes charges for both kilowatt-hours and for kilowatt demand.
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