Reducing Demand Charges in Energy Bills

by | Sep 9, 2016 | Industrial Energy & Onsite Utilities, Industry | 0 comments

The cost of electrical power has grown more complex over time. It used to be that your kilowatt-hours (kwh) consumed were tallied to arrive at the cost. As the metering has grown more sophisticated, variable rates have emerged based on peak energy usage, time of day, usage thresholds and more.

Emerson's Bill Thackston

I connected with Emerson’s Bill Thackston to learn about a meeting he recently attended on energy management information systems (EMIS). He noted that an often overlooked opportunity around energy savings involves reduction of demand charges. These are:

…based on the highest 15-minute average usage recorded on the demand meter within a given month. If your facility tends to use a lot of power over short periods, your demand charges will comprise a larger part of your bill. If you use power at a more consistent rate throughout the month, your demand charges will generally be a smaller part of your bill.

In his discussions with industrial energy managers, they often confirm that demand charges are a significant portion of their energy costs. As an example, demand charges for electricity are typically around one third to one half of the total electrical bill. While demand charges are most commonly associated with electricity, they can also apply to any purchased energy, such as natural gas or fuel oil. Demand charges can even apply to other consumables such as water. It’s also worth noting that demand charges typically do not follow base energy prices, as evidenced by increases over the past several years despite low energy prices.

Bill described the two components typically found in a demand power contract. First, and most obvious, is the total electrical usage, usually metered in kwh. The second factor is the peak power, usually measured in kilowatts (kw). For those familiar with power contracts, this is admittedly a gross oversimplification. There are many creative data metrics in place, using moving 15 minute averages for KW and KVA, penalties on power factor, and many more, such as, “90% of the monthly maximum kW demand recorded during the current calendar year, excluding April through November”. Even so, this simplification is quite useful to illustrate the potential impact of demand reductions.

For a hypothetical industrial facility, let’s assume a monthly electrical bill of $600,000 of which one third is a demand charge. Specifically:







Assuming a usage charge of $0.06/kwh and a demand charge of $14.00/kw, this means:



/ 0.06

6,666,666 kwh

Average: 9259 kw



/ 14


Peak: 14,286 kw

The peak is $54% higher than the average electrical power usage. This means that the extra 5,027 kw used at peak level multiplied by the $14 accounts for $70,378 each month or $844,536 annually if the other months are identical.

This variability in electrical demand is a function of operational factors such as sequence of operation, startup/shutdown and product changes. For example, for equipment that runs continuously, each 1 kw power reduction saves roughly $.06*30*24 + $14 = $57.2 per month. If you consider demand costs, it reveals an additional 33% savings above the pure usage cost.

To put this in terms of a single piece of equipment, consider a 1000 HP motor. Its electrical use is about 750 kw, under current conditions. If the plant can reduce the motor load 1% by making process changes, this equates to $57.20 * 7.5 = $429.00 per month. Possibly worthwhile, but consider the same motor being used about 25% of the time, and that further study shows it to be operating consistently during peak demand times.

Now a 1% reduction gives $.06*30*24/4*7.5 + $14*7.5 = $186.00 per month, but this misses a really interesting opportunity. If the timing of the motor’s operation can be adjusted to avoid contributing to the peak, the monthly savings, even without any process or equipment improvements, are $14 * 750 = $10,500.00 per month, or $126,000 annually.

A careful review of energy use within a facility can uncover significant opportunities for savings. Further, these savings may be accomplished with little or no capital investment. Even in times of lower energy prices, you may have significant opportunity to reduce energy costs.

In part 2, we’ll look at ways to better identify these opportunities for energy savings.

If you’ll be joining us in Austin for the October 24-28 Emerson Exchange conference, make sure to catch Bill’s workshop, It’s Not Rocket Science – a Phased Approach to Energy Management at NASA and sign up for the Educational Services course, Energy Management Strategies for Process Plants. You can also connect and interact with other industrial energy experts in the Industrial Energy group in the Emerson Exchange 365 community.

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