Demand Charges Explained for Cannabis Cultivators

What a demand charge measures

Your bill has two kinds of usage. Energy, in kilowatt-hours, is how much electricity you consumed over the month. Demand, in kilowatts, is how fast you consumed it at your worst moment. The utility's meter averages your draw over fixed windows, typically 15 minutes, and the highest window of the month becomes your billed demand [nrel-demand-charge-survey]. Some utilities use 30-minute windows instead. ComEd's larger delivery classes, for example, bill a distribution facilities charge per kW of the highest 30-minute demand [il-plugin-illinois], and Santee Cooper in South Carolina bills on the maximum 30-minute interval in the period [santee-cooper-demand].

The reason utilities do this is straightforward. Wires, transformers, and generating capacity have to be sized for the peak, whether the peak lasts one interval or all month, and demand charges push that cost onto the customers who create it [nrel-demand-charge-survey]. NREL's survey of more than 10,000 tariffs found that demand can account for anywhere from 30 to 70 percent of a commercial customer's bill [nrel-demand-charge-survey], and it found some of the country's highest demand rates in states not known for expensive electricity, such as Colorado and Arizona [nrel-demand-charge-survey].

The important mechanic: two customers with identical monthly kWh can pay very different demand charges. The one whose load is flat pays little. The one whose load spikes pays a lot. See peak demand vs. peak usage for the difference in plain terms.

Why grow facilities get hit harder than other buildings

Three things about an indoor cultivation facility make it a demand-charge magnet.

Lighting is most of the load and it switches together. In the Northwest Power and Conservation Council's survey of licensed producers, lighting was 66 percent of total electricity use, and flowering rooms alone were 49 percent [nwpcc-cannabis]. A flower room does not ramp; a timer closes a contactor and several hundred kilowatts appear inside one interval. If every flower room shares a photoperiod, the whole facility peaks in the same 15 minutes.

HVAC chases the lights. Cooling and dehumidification made up most of the remaining third in the same survey, with cooling at 15 percent of total use [nwpcc-cannabis]. Compressors start when the room heats up, which is right after lights-on. The lighting spike and the HVAC spike stack. Our page on dehumidification load covers the latent side of this.

The schedule is rigid. An office can pre-cool and an industrial plant can shift a batch. A photoperiod is biology, and a flowering room needs its 12 hours. You cannot shed the load, but you can decide when each room's 12 hours happen, which is the main lever discussed below.

The result is a load profile that is flat for 12 hours and lower for 12, with a sharp edge at each transition. Utilities bill the edge.

Ratchets: paying for a peak you set last summer

A ratchet clause sets a floor under your billed demand based on past peaks. Indiana Michigan Power's tariff language is typical: billing demand shall not be less than 60 percent of the customer's highest monthly billing demand established during the past 11 months [im-tariff-iurc]. Santee Cooper uses 30 percent of the highest billed demand from the previous 11 months and notes that is lower than most neighboring utilities [santee-cooper-demand].

What that means in practice:

• If your peak in July was 600 kW and your tariff has a 60 percent ratchet, you will be billed for at least 360 kW every month through the following June, even in a month where you fallowed two rooms and only drew 250 kW.
• A single bad interval, say a maintenance day when someone turned every room on at once to test the lights, can raise your floor for a year.
• Ratchets are why "we cut our usage 20 percent and the bill barely moved" is such a common complaint in this industry.

Ratchet terms vary widely, and some tariffs have none. It is the first thing to read in your delivery tariff, and the first thing to check when you are moving into a building whose previous tenant set a high peak on the same meter. The FAQ on demand charge questions covers what to ask the utility about inheriting a meter.

A worked example

Every number in this example is an input we chose so you can follow the math. Swap in your own.

Inputs (assumed):

Scenario A: both flower rooms on the same photoperiod.

• Lighting peak: 10,000 sq ft × 35 W = 350 kW
• HVAC at lights-on: 350 × 0.5 = 175 kW
• Other: 25 kW
• Coincident peak: 550 kW
• Demand charge: 550 kW × 12 dollars = 6,600 dollars per month

Energy for the month (30 days): lights 350 kW × 12 h × 30 = 126,000 kWh; HVAC averaging about 120 kW around the clock = 86,400 kWh; other 25 kW × 24 × 30 = 18,000 kWh. Total 230,400 kWh × 0.145 = 33,408 dollars. Demand is 6,600 of a roughly 40,000 dollar bill, about 16 percent. That is on the low end of NREL's range because we assumed a modest 12 dollars per kW; at 20 dollars per kW the same peak costs 11,000 dollars and the share rises to about 25 percent.

Scenario B: flip the second room's photoperiod 12 hours.

Now only one room's lights are on at any moment.

• Lighting peak: 5,000 sq ft × 35 W = 175 kW
• HVAC at lights-on: 175 × 0.5 = 88 kW (the dark room still needs some dehumidification, so call it 100 kW total HVAC)
• Other: 25 kW
• Coincident peak: about 300 kW
• Demand charge: 300 × 12 = 3,600 dollars per month

Energy use is essentially unchanged, because the same lights run the same 12 hours. The saving is 3,000 dollars a month, 36,000 dollars a year, from a scheduling decision.

The ratchet catch. If you ran Scenario A for a year and switch to Scenario B in August, the tariff's 60 percent ratchet holds your billing demand at 0.6 × 550 = 330 kW until the July peak ages out of the 11-month window. For those months you pay 330 × 12 = 3,960 dollars, not 3,600. The full saving only shows up after the ratchet clears, which is why a change made in month one of a lease is worth more than the same change made in month nine.

You can run your own numbers in the demand charge estimator.

Strategies, ranked by how much they usually move the number

1. Stagger photoperiods across rooms. The example above. Costs nothing but a planning conversation, and it also halves the HVAC coincident peak. Facilities with four or more flower rooms can stagger lights-on by 15 to 30 minutes within a photoperiod group so the contactors do not all close in the same interval.
2. Soft-start and sequence HVAC. Let compressors and dehumidifiers stage in over the first half hour after lights-on instead of all starting at once. A controls integrator can usually do this with existing equipment.
3. Know your interval. Download AMI data and find the exact minute that sets your peak each month. It is often not lights-on; it can be a well pump, a CO2 burner, or the drying room's dehumidifiers all cycling together. See interval data and AMI meters.
4. Check the rate class. Utilities set demand-based classes by peak kW, and a facility sized during construction may sit in a class with a higher per-kW rate than its actual load justifies. See utility rate classes explained.
5. Dim rather than switch, where the crop allows. Ramping LED fixtures up over 15 to 30 minutes spreads the edge across intervals so no single window sees the full step.
6. Storage. A battery discharges during the lights-on edge and recharges overnight. NREL estimated nearly 5 million commercial customers face demand charges high enough (roughly 15 dollars per kW and up) for storage to pencil [nrel-demand-charge-survey]. It works best against short, tall peaks; a grow's 12-hour plateau needs a large battery, so the economics are case by case.
7. Supply contract structure. In PJM, NYISO, and ISO-NE, part of what you pay a supplier is capacity, allocated by your draw during the regional peak hours. A supplier contract can fix or pass through that cost, but it cannot change the utility's delivery demand charge. The bill walk-through in understanding your commercial utility bill shows which line is which.