First, let’s start by looking at the units of measure
Now, let’s illustrate that with an example:
One 100-watt light bulb burning for 10 hours consumes 1,000 watt-hours or 1 kWh. The entire time it is on, it requires a “demand” of 100 watts or 0.1 kW from the utility.
That means the utility must have that 0.1 kW ready whenever the customer turns the lamp on.
Similarly, 10 x 100-watt light bulbs burning for 1 hour consume 1,000 watt-hours or 1 kWh. Because all 10 lamps are only on for 1 hour they require the entire demand of 1000 watts or 1 kW at the same time. That means the utility has to make 1kW available to that company at all times because it doesn’t really know when that one hour will be when the lights are on.
Note that in both examples, the consumption is 1 kWh, however, the serving utility must be prepared to provide ten times as much ‘capacity’ in response to the “demand” of the 10 light bulbs operating all at once compared to the 1 light bulb for 10 hours.
If both of these customers are billed for their consumption only, both will get the same bill for 1 kWh of energy. And that is the way most residential customers are billed. But the requirement for the utility to meet this energy requirement is very different. In the second case, the utility has to have 10 times more generating ‘capacity’ to provide the second customer’s brief high demand for power compared to the first case.
Commercial and industrial customers are often billed for their hourly consumption patterns and their peak demand for energy. These customers often have special meters that measure both, unlike residential meters that just record total consumption in a time period, usually one month.
Residential consumers usually don’t get billed for demand because their use patterns are much more predictable and the meters to measure demand are much more expensive than the simple residential units.
Let’s summarize: electric power use is metered in two ways: on maximum kilowatt use during a given time period (i.e., kW demand typically measured in 15-minute or 30-minute intervals) and on total cumulative consumption in kilowatt hours (kWh). A customer’s electric rate is set using a complex process of tracking cost of services and often seeking regulatory approvals.
The general theory is that demand charges reflect the utilities’ fixed costs of providing a given level of power availability to the customer, and energy charges reflect the variable portion of those costs as the customer actually uses that power availability.
Power companies often use a meter that records the power use during either a 15- or 30-minute time window. The average power used during that window is used to calculate the kW demand. The peak demand used for billing purposes in any month can be
The meter recording kWh power use during either a 15- or 30-minute time window also tallies total kWh use. This meter is read at roughly monthly intervals and total power use is billed according to applicable pricing schedules.