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Understanding Demand Charges in Texas Electricity Plans



Understanding Demand Charges in Texas Electricity Plans

Understanding electricity costs is crucial for residential and commercial customers alike. Pricing structures, energy usage patterns, and tariffs can all impact electricity costs.

One of the top mistakes made by business electricity shoppers is paying attention to demand charges. These are based on a company’s peak power consumption and can significantly impact bills.

Energy Efficiency

Residential and commercial electricity costs differ in Texas due to different tariff structures, regulatory policies, energy usage patterns, and energy efficiency measures. Understanding these differences empowers customers to make more informed decisions about their electricity consumption and energy costs. They can reduce demand charges by adopting energy-efficient practices or exploring renewable energy options. And they can take advantage of competitive business plans that offer low rates without incorporating demand charges.

Reducing energy demand is the best way to lower demand side charges on your business’s electricity bill. However, achieving that goal can be challenging, especially when the supply of affordable natural gas or petroleum-based fuels is constrained due to weather events and other factors.

That’s why it’s essential to understand the role of demand charges in your electricity bill, mainly if you operate a large business. These rates reflect the maximum power your business uses at a specific time, known as peak demand. Your peak demand can be measured using interval data recorders or IDR meters. The data collected during the 15-minute grid peak each summer, June through September, is used to calculate your demand charge.

The good news is that most Texas businesses can shop for a new business energy plan with a retail electric provider like Using EnergyBot to compare Texas electricity rates and providers, business customers can find a plan that meets their needs at an attractive price point.


Residential electricity rates vary widely by region and are often influenced by local weather patterns and energy demand. For example, during hot summers, households use more electricity for cooling. Consequently, peak power demands can significantly impact electricity costs for these customers. Residential customers should be aware of the potential for high electricity prices and take steps to manage energy consumption and expenditures.

The TDSP charges on a residential utility bill are calculated based on the maximum power demand for an hour, measured in kilovolt-amperes (kVA) or kilowatts. The total TDSP charge is billed along with the per-kilowatt-hour energy charges on the customer’s electricity plan. Residential customers can reduce TDSP charges by lowering their consumption during peak hours and scheduling the start-up of large equipment, such as air conditioners.

Unlike most states, Texas has deregulated the electricity market, giving consumers many choices of retail electric providers that offer competitive plans in one market. Consumers can select a plan that fits their budget by choosing between fixed-rate and variable-rate options. Regardless of their provider, the local electric utility remains responsible for delivering the energy to homes and businesses, tracking usage, maintaining the electric wires, and handling non-recurring charges. 


Businesses have different energy needs, requiring customized plans to meet their specific business requirements and help them control costs. Choosing the best business plan involves factors like contract term lengths, pricing options (fixed or variable), green energy options to meet sustainability goals, and more.

Regarding commercial rates in Texas, many factors affect electricity prices. One crucial factor is peak demand charges. These fees are based on the maximum amount of electricity used at any given time, and they can make up 20-50% of a business’s total electricity bill. Understanding how peak demand charges work and how to lower them can help businesses find the right plan for their needs.

Your peak demand is calculated during 15-minute intervals throughout a month by your transmission and distribution service provider (TDSP). It is measured in kilowatts or kilovolts, and it determines which rate class your business is charged. 

The best way to avoid paying high demand charges is to use less energy at the times of highest usage, which can be achieved by using equipment in a staged manner rather than turning it all on or off at once. Lowering demand by upgrading to more energy-efficient equipment or switching to a renewable energy source is possible.


If your business is large and consumes a lot of electricity, look for a plan with lower peak demand charges. These charges apply during the grid’s highest demand, typically on hot summer days when everyone uses air conditioning. These charges cover a utility’s fixed costs and maintain system reliability during high-load periods.

Many retail electricity providers offer plans that tie your per-kilowatt-hour rate to a specific market index. This plan is best for businesses that want to reduce risk and align their electricity pricing with the market. You can also find renewable energy plans, which source a portion or all of your power from sources like wind and solar. These plans support green energy and may have slightly higher prices, but they can help you save money by avoiding volatile market conditions.

The TDU delivery charges on your commercial bill are based on your utility’s tariff, which the Public Utilities Commission of Texas (PUCT) approves. These charges are based on your meter type, usage, and demand. Changing your Retail Electricity Provider (REP) for supply can change the amount you pay for your supplies, but it won’t change your TDSP charges.

Your TDU’s demand charges will also depend on the duration and intensity of your business’s electricity usage during the grid’s peak hours. You can reduce these charges by minimizing usage during peak demand times and taking advantage of energy efficiency programs offered through your TDU, which may include rebates or incentives for lighting fixtures, air conditioning systems, and other equipment.