Demand Charge (Solar Modeling)

A demand charge is a utility billing component that charges commercial and industrial customers based on their highest peak power usage (measured in kW) during a billing cycle. In solar modeling, demand charges are a critical factor because solar PV alone may not always reduce peak demand—especially when peak loads occur outside sunlight hours.

Understanding how demand charges interact with a PV system, battery storage, load profiles, and TOU rates is essential for accurately forecasting savings, designing optimized systems, and choosing the right solar + storage configuration.

Modern platforms like Solar Designing and advanced financial tools such as the Solar ROI Calculator incorporate demand-charge modeling to calculate true customer savings and ROI, especially in markets like California, New York, Texas, Australia, and India where demand tariffs are widespread.

Key Takeaways

Demand charges bill customers based on their highest peak power usage.
They are a critical part of solar + storage financial modeling.
Solar alone reduces demand charges only when peaks occur during sunlight hours.
Batteries are the primary tool for peak shaving and demand charge reduction.
Proper modeling requires accurate load profiles, TOU windows, and system dispatch logic.

What Is a Demand Charge?

A demand charge is a fee that utilities impose based on the highest 15-minute (or 30-minute) power draw a customer reaches during a billing period. It reflects the customer’s impact on grid capacity—how much power the utility must be ready to supply at any given moment.

Unlike energy charges (measured in kWh), demand charges are based on peak kilowatts (kW).

In solar design and financial modeling, demand charges:

Influence total customer savings
Determine viability of solar-only vs. solar + battery
Affect payback period and system economics
Drive design decisions about peak load offsetting

Related foundational concepts include Load Analysis, Energy Production Forecasting, and Battery Energy Storage.

How Demand Charges Work in Solar Modeling

1. Utility Measures Peak Demand

The utility identifies the highest average power draw (kW) during a defined window—typically:

15-minute intervals
30-minute intervals

2. Demand Charge Rate Applies

This rate is billed in $/kW or ₹/kW depending on region.

Example: $12/kW or ₹400/kW.

3. Solar Offsets Demand Only When Generation Matches Load

If the building hits its demand peak while the PV system is producing, solar can reduce demand charges.

If the peak occurs:

Early morning
Late evening
At night
During cloudy intervals

Solar alone may not reduce demand charges.

4. Batteries Are Often Used for Peak Shaving

Storage systems can discharge during high-load periods to bring down peak demand.

See Peak Shaving.

5. Modeling Tools Simulate Peak Demand Reduction

Platforms must combine:

Load profiles
PV generation profiles
Time-of-use patterns
Billing structure
BESS dispatch logic

SurgePV’s financial modeling engine integrates these factors for accurate ROI forecasting.

Types / Variants of Demand Charges

1. Basic Demand Charge

Based on the single highest kW peak in the billing cycle.

2. Time-of-Use (TOU) Demand Charge

Higher charges during peak grid demand (e.g., 4–9 PM).

3. Coincident Peak Demand Charge

Based on the customer’s usage during the system peak hour.

4. Contracted Demand

In some regions (India/EU), customers pay for:

Contracted load
Penalties for exceeding it

5. Non-Coincident Peak Demand

Based on the customer’s own peak, regardless of grid conditions.

How Demand Charges Are Measured

Demand charges rely on:

Peak Power (kW)

Highest average load during the utility-defined interval.

Billing Interval

Utility measurement period (15 or 30 minutes).

Demand Rate

Cost per kilowatt:

$/kW
₹/kW
€/kW

Load Profile Data

Hourly or sub-hourly customer consumption.

Used heavily in solar + storage modeling.

See Load Profile Analysis.

Typical Values / Ranges (By Market)

Demand charges can represent 30–60% of a commercial electricity bill.

Practical Guidance for Solar Designers & Installers

1. Identify when the customer’s peak actually occurs

Is the peak during:

Midday? Solar helps.
Evening? Solar-alone won’t solve it.

2. Always model load profiles

Use interval data to map demand peaks accurately.

3. Use storage for peak shaving

Solar + battery systems are often required for meaningful demand charge reduction.

See Battery Energy Storage System.

4. Evaluate TOU demand windows

TOU-based demand can dramatically change savings calculations.

5. Use proposal tools that include demand modeling

SurgePV’s financial engine factors in demand tariffs automatically.

6. Explain demand charges clearly to customers

Many C&I customers don’t understand how peaks are billed—clarity improves sales conversion.

7. Size batteries properly

Undersized batteries fail to shave demand effectively.

See Battery Size Calculator.

Real-World Examples

1. Commercial Building in California

Peak occurs at 6 PM.

Solar alone does not reduce demand charges.

Battery discharges at 5–7 PM, reducing peak from 150 kW → 90 kW.

2. Manufacturing Facility in India

Contracted load: 400 kW

Facility peaks at 480 kW → incurs penalties.

Solar offsets midday load, and battery prevents exceeding contract limit.

3. Big Box Retail Site

Demand charges represent 55% of their bill.

Solar + storage deployment reduces annual demand costs by 40%.