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Electrical Rates Demystified

By April 2, 2012December 27th, 2021Briefs

Electricity and gasoline are commodities that almost everyone relies on. Electricity, however, is more complicated than gasoline because you cannot (at least not yet, in most places) physically watch the price rise as you do at the pump.

Previously, we walked you through energy and demand charges in “Commercial and Industrial Electrical Bills”. This time we will discuss intricacies of those large commercial and industrial (C&I) electric bills.

Your Demand and Energy versus Time and Season

Utilities forecast how much demand (MW) and energy they will need at certain parts of the day and year, which helps structure the rates. The time when the electric utility usually sees the highest demand is called on-peak. The cost for your energy and demand will normally increase during the on-peak time because utilities are more likely to use more costly generators to keep up with demand. These are generators that are usually sitting idle until needed.

Off-peak time is usually all the time not considered on-peak. Since energy consumption and demand is lower during off-peak hours, utilities can usually run generators that are less costly to operate and produce less expensive electricity.

On and off-peak are usually referred to as time-of-day, or time-of-use rates. Specific on-peak and off-peak times vary by utility. Not all utilities have time-of-use rates and even those that do, do not bill all customers using those rates.

Some utilities may have another rate for transitioning from on-peak to off-peak. This is sometimes called a shoulder rate. Also, some utilities have a rate for very high peak energy cost that is referred to as super or critical peak. For the most part, the warmer the climate the more, (or larger), segments of time-of-use rates exist, particularly in the summer months. The chart shows how time-of-day rates can be split up and vary by utility.

Many commercial and industrial rates are different for winter and summer reflecting the same cost issues as time-of-day. The summer demand rates are higher than the winter demand rates because more costly energy sources are needed, or the utility may need to purchase power from other providers. Summer and winter months are defined differently among utilities but can be easily determined from the billing tariffs, which are typically available on utility web sites.


Large C&I customers are charged for electrical demand because they can significantly impact the generation, transmission and distribution costs. Customers that use little energy (kWh) may get a large bill due to high demand.

Customers do have options to minimize demand charges. These include using on-site generation, or interruptible rates. Interruptible rates that offer demand charges at reduced rates may be available if customers agree to reduce demand to a predetermined level during times of utility peaks.


Understanding your rate will help you determine how you are spending your electricity dollars. A look at your bill may reveal your rate (tariff), and descriptions of rates/tariffs are usually available online. Knowing how or when you are charged might help with the decision to implement certain energy efficient and demand response technologies.

Michaels Energy

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