While many businesses track their electricity costs, there are many aspects of an electric bill that may not be obvious at first glance. One of those is capacity and peak demand, two charges that show up on many commercial electricity bills but are rarely explained in plain terms.
As electricity demand grows across North America, so does the investment needed to keep the electric grid reliable. Those investments often show up on commercial electricity bills as capacity and transmission charges, line items many businesses see every month without knowing exactly what they pay for.
Understanding what drives these costs can help your business make more informed energy decisions and prepare for a changing electricity landscape.
Why Electricity Demand Is Growing
Electricity demand is entering a period of growth not seen in decades.
Businesses are electrifying equipment that once ran on fossil fuels. Electric vehicles continue to gain ground, manufacturers are expanding production, and heat pumps are replacing older heating systems. At the same time, artificial intelligence and data centers are adding significant new demand to the grid.
According to the U.S. Department of Energy (DOE), electricity demand growth is expected to continue as these trends speed up. The DOE points to a possible 15-20% increase in total U.S. electricity demand over the next decade.
[Source: https://www.energy.gov/oe/clean-energy-resources-meet-data-center-electricity-demand December, 2024]
Meeting this demand takes more than producing more electricity. The grid also needs enough capacity ready to deliver power whenever businesses and households need it most.
What Is Electricity Capacity?
The easiest way to understand capacity is to compare it with energy use.
- Energy, measured in kilowatt-hours (kWh), is the amount of electricity a business uses over time.
- Capacity, measured in kilowatts (kW), is the maximum amount of electricity that needs to be available at any single moment to meet demand.
Think of it like a highway. Engineers do not build highways based only on a typical afternoon of traffic. They build them to handle rush hour, when the most cars are on the road at once. The electric grid works the same way. Utilities and grid operators need enough generation and transmission capacity ready to meet the highest levels of demand, even if that only happens for a few hours a year.
The price of capacity is set by the regional grid operator through an auction process, not by your utility or your supplier. But who bills you for it, and how it reaches your bill, depends on your setup. If you’re on utility default service, the utility bills capacity directly. If you are using a competitive supplier, that supplier is responsible for the capacity tied to its customers, and how that cost shows up on your bill depends on your contract. Contract structure does not change the underlying capacity price, but it can change how that cost is passed through to your business.
Understanding Peak Demand
Peak demand is the period when electricity use reaches its highest point across the grid.
These peaks commonly happen during:
- Hot summer afternoons when air conditioning runs at full capacity
- Extreme winter cold when electric heating use increases
- Heat waves or cold snaps that affect a wide region
- Periods of heavy commercial and industrial activity
These peak periods may only last a few hours a year, but the grid still needs to serve every customer reliably through them. If capacity is not available during peak demand, the risk of service disruptions increases. That is why utilities and grid operators plan years ahead to make sure enough resources are ready when demand spikes.
What Shows Up on a Commercial Electricity Bill
Commercial electricity bills include more than the cost of the electricity itself. Depending on your market, your bill may include:
- Energy costs: the electricity your business actually uses
- Capacity costs: the cost of making sure enough generating resources are available during the highest demand periods
- Transmission costs: the cost of moving electricity across high-voltage power lines
- Ancillary services: costs that help keep the grid stable and reliable
- Renewable and efficiency program charges: state or utility-specific charges that fund renewable energy and efficiency programs, such as Mass Save in Massachusetts
Transmission charges may go by different names depending on where your business operates. Businesses in the PJM market may see Network Integration Transmission Service (NITS) charges, while businesses in the New York market may see Transmission Owners Transmission Solutions (TOTS) or Public Policy Transmission (PPT) charges. The names vary, but the purpose is the same: these charges help fund the infrastructure needed to deliver electricity safely and reliably.
While we often think of a bill as two clean parts, supply and delivery, capacity does not sit neatly in either one. The underlying capacity price is always set by the grid operator, and no supplier changes that price. What can change is how the cost reaches you. If your business buys through a competitive supplier, capacity and transmission are typically built into your supply price rather than billed separately by the utility. This is where contract structure matters. It won’t change the price the grid operator sets, but it can affect how predictable that cost is for your business.
Why Transmission Investment Keeps Rising
Demand growth is not the only reason utilities keep investing in transmission infrastructure. Much of the electric grid across North America was built decades ago and needs updating. At the same time, new renewable energy projects, rising electricity use, and more frequent weather-related reliability challenges all call for added transmission capacity.
In New England, ISO-NE, the region’s grid operator, estimates that $620 million to $1 billion in transmission reliability investment will likely be needed each year through 2050 to support the region’s clean energy transition. Since 2002, ISO-NE’s planning work has already supported $13.1 billion in transmission investment across the region.
These investments are meant to improve grid reliability, but they also contribute to the transmission-related charges businesses see on their bills.
What Capacity Means for Your Bill Going Forward
Many businesses focus mainly on the price they pay for electricity. Understanding how that price is built can give a clearer picture of where the costs come from.
Capacity and transmission charges reflect ongoing investment in a grid that can serve businesses during the busiest hours of the year. As demand grows, these charges may make up a larger share of the total bill.
Strategies Businesses Can Consider
No business can control regional electricity demand, but there are practical steps a business can take to manage its own usage. Depending on your operations, you might consider:
- Improving energy efficiency across your facility
- Optimizing HVAC systems and building controls
- Shifting some operations outside peak demand hours
- Adjusting production schedules where practical
- Looking into backup generation where appropriate
- Participating in demand response programs where available
These strategies are things a business can manage directly. They work alongside, not instead of, choosing the right electricity supply contract. A broker like Sprague can help with the supply side of your bill. The steps above involve your own equipment, schedule, and operations, so they are ones only your business can put into practice.
Looking Ahead
Electricity demand is likely to keep growing as transportation, buildings, manufacturing, and digital infrastructure become more electrified. Meeting that demand will call for continued investment in generation, transmission, and grid reliability.
For businesses, understanding capacity and peak demand is one more tool for planning ahead, rather than an unexplained line on a monthly bill.
Partner with Sprague on the Part of Your Bill You Can Control
Electricity markets keep changing as demand grows and infrastructure investment expands. Understanding what drives your electricity costs is the first step toward making informed decisions.
As a third-party broker, Sprague does not set the price of capacity. That price comes from the regional grid operator’s auction, and no supplier or broker can change it. What Sprague can do is help you choose a contract type that fits how your business buys energy, including how that contract structures your capacity exposure, and help you secure a strong supply rate. Understanding your bill is the first step. Choosing the right contract is where Sprague can help.
Contact Sprague today to talk about your electricity supply strategy.
