Capacity Charges Explained: How They Impact Commercial Energy Costs in 2025
Capacity charges are a major factor in commercial energy bills, especially for businesses operating in regulated or competitive electricity markets. These charges ensure the grid can meet peak demand, but they also add significant costs for organizations that don’t manage their load effectively. Understanding how capacity charges work—and how to reduce them—can help businesses lower their energy expenses and improve operational efficiency.What Are Capacity Charges?
Capacity charges are fees paid by commercial customers to guarantee that enough electricity is available during periods of highest demand. These charges are not based on your total energy usage, but on your peak demand—specifically, how much power your facility uses during the grid’s busiest hours. The higher your peak demand, the higher your capacity charge. Capacity charges are typically calculated using a metric called the capacity tag, which is your facility’s highest measured demand (in kilowatts) during the previous year’s peak periods. This tag determines your capacity charge for the next year, regardless of your average usage.
A business owner reviews a confusing energy bill—highlighting the growing impact of capacity charges and rising commercial electricity costs in 2025.
How Capacity Charges Affect Commercial Energy Bills
For most commercial businesses, capacity charges can make up 15% to 35% of the total electricity bill. For facilities with high or inefficient energy use, this percentage can be even higher. Unlike supply charges, which are based on total kWh used, capacity charges are fixed for the year and depend solely on your peak demand. Because capacity charges are set annually, reducing your peak load during the designated measurement period can have a lasting impact on your energy costs. For example, if your business reduces its peak demand by 10% during the grid’s peak hours, your capacity tag—and your capacity charges—will be lower for the next 12 months.Strategies to Reduce Capacity Charges
Managing capacity charges requires proactive load management. Here are several strategies businesses can use:- Peak Load Shifting: Schedule energy-intensive operations outside of peak hours to lower your facility’s demand during critical periods.
- Demand Response Programs: Participate in utility programs that reward businesses for reducing energy use during peak events.
- Energy Storage: Install battery systems to offset peak demand and reduce your capacity tag.
- Solar Power: Solar installations can significantly reduce peak demand, especially during summer months when capacity tags are often set.
- Energy Audits: Conduct regular audits to identify inefficiencies and opportunities for load reduction.
