Demand Charges vs. Demand Ratchets: Which Applies to You

Demand charges are often the part of a commercial electric bill that most rewards operational attention, but not all demand charges behave the same way. An ordinary demand charge resets every month. A demand ratchet does not fully reset, letting a single high peak follow you for months. Whether your account is subject to a plain demand charge or a ratchet changes how costly one bad peak really is and how far ahead you need to plan. This guide explains how each works, how to tell which applies by reading your tariff and bill, and what each means for how you operate.

How an Ordinary Demand Charge Works

A demand charge bills you for peak demand, measured in kilowatts, usually the highest demand your facility reached during the billing period. Utilities typically measure demand over short intervals, often the highest rolling fifteen-minute interval in the month, and bill on that peak. Unlike energy charges, which reflect total kilowatt-hours consumed, a demand charge reflects the intensity of your draw at its single highest moment.

The defining feature of an ordinary demand charge is that it resets each billing period. This month's demand charge is based on this month's peak. If you ran hard in July and then reduced your peak in August, your August demand charge reflects the lower August peak. Each month stands on its own. That makes the improvement from cutting a peak immediate and visible: reduce this month's highest interval and this month's demand charge follows.

We cover the mechanics of peak demand billing in depth in the commercial demand charges overview, including why the timing of a single interval can matter more than total usage.

How a Demand Ratchet Works

A demand ratchet breaks the clean monthly reset. Under a ratchet, your billed demand for a given month is not simply that month's peak, it is the greater of the current month's demand or some percentage of a peak you reached earlier, measured over a defined lookback period. The prior peak sets a floor. Even if your actual demand this month is well below that floor, you are billed as though you reached at least the floor.

The practical effect is that one high peak can echo forward. Suppose a facility hits an unusually high demand during a single busy stretch. Under an ordinary demand charge, that peak costs more only in the month it occurred. Under a ratchet, that same peak can raise the billed demand floor for every month in the lookback window, so the facility keeps paying for that peak long after the busy stretch ended, even during quiet months when its real demand is much lower.

Utilities use ratchets because they size local distribution equipment to a customer's highest demand. Once a transformer and service are built to handle a facility's peak, that capacity must remain available whether or not the customer uses it every month. The ratchet is the tariff mechanism intended to recover the cost of that reserved capacity across the year rather than only in peak months.

How to Tell Which Applies to You

You cannot tell from the headline rate alone. The governing document is your utility rate schedule, the tariff that applies to your account. Ratchet provisions, where they exist, are written into that schedule.

Read the tariff's billing demand definition. Look at how the rate schedule defines billing demand. An ordinary demand charge defines it in terms of the current period's measured peak. A ratchet defines billing demand as the greater of the current period's demand or a stated percentage of a maximum demand recorded over a prior span of months. Language referring to a percentage of a prior or maximum demand over a lookback period is the signal that a ratchet is present.

Compare billed demand to actual demand on your bill. Your bill shows a billed demand figure used to calculate the demand charge. Compare it against your actual metered peak for the month, which you can confirm from your interval data. If billed demand consistently equals your actual monthly peak, you are likely on a plain demand charge. If billed demand stays elevated in months when your actual peak dropped, a ratchet floor is the usual explanation.

Check which rate schedule you are on. Rate schedule eligibility often depends on facility size and demand level, so larger accounts are more likely to fall under schedules that include ratchet provisions. Your utility can confirm your current rate schedule. For northern Illinois see ComEd; for central and southern Illinois see Ameren. Always confirm the specific provisions against the current tariff on file with the Illinois Commerce Commission, since rate schedules and their terms change over time. The mechanics of locating the demand line on your bill are covered in how to read a ComEd commercial electric bill.

Operational Implications

The distinction is not academic. It changes the payoff math on peak management.

Under an ordinary demand charge, peak management is a monthly game. Each month you try to keep your highest interval as low as your operations allow, and each month stands alone. A peak you fail to prevent costs you once. This favors steady, ongoing discipline: staggering equipment startups, avoiding simultaneous operation of large loads, and smoothing your demand profile so no single interval spikes.

Under a ratchet, the stakes on any single peak are much higher, because one avoidable peak can raise your billed demand for the entire lookback window. Preventing that one peak protects a run of future bills, not just the current one. This raises the value of a few specific defenses:

• Guard against rare, avoidable spikes. A one-time event, such as running every large load at once during an unusual push, can set a ratchet floor you carry for months. Identifying and preventing those exceptional peaks matters more than shaving routine ones.
• Plan seasonally. If your demand naturally peaks in one season, a ratchet can carry that seasonal high into your off-season bills. Knowing that in advance helps you decide whether investing in peak reduction during the high season is worth it, since the benefit extends across the lookback window.
• Treat startup and testing carefully. Bringing new equipment online, or testing backup systems under load, can create a brief peak. Under a ratchet, do it deliberately and, where possible, sequence it to avoid setting a new floor.

Keep the utility demand charge distinct from the supply-side capacity tag. Both reward reducing peak demand, but the demand charge and any ratchet are set by your utility tariff on the delivery side and stay with the utility regardless of your supplier, while the capacity tag reflects your contribution to the regional system peak on the supply side. The peaks that matter for each can occur at different times, so managing one does not automatically manage the other.

Sources

• Illinois Commerce Commission
• ComEd
• Ameren Illinois

This guide explains how demand charges and ratchets work so you can identify which applies to your account and plan accordingly. It does not quote rates, ratchet percentages, or savings figures; confirm the exact provisions in your current utility rate schedule, which governs your account regardless of your supplier.