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An electric demand meter works on the principle that customers who require a higher or more intensive level of service during bursts of peak demand should pay more for the availability of that service. This is because of the demand placed on the electricity grid to accommodate peak-level demands for service. Even if that level of service is necessary for only 15 minutes a day once every two weeks, when it's needed, it must be immediately available.
Electricity flows in a current. It cannot be stored. It's not possible to cut back on electricity four or five days in advance to have power on reserve for peak demand. A demand meter calculates billing based on the highest level of service that a residential or commercial customer would possibly need.
A demand meter is similar to a car's speedometer that can register speeds of 100 miles (161 km) per hour or more. Although the car's usual driving speed, even on an expressway, will be much lower, there might be times when the car needs to go as fast as possible, such as when passing a slow-moving car on a two-lane highway. The speedometer is designed to handle the car's peak demand for driving speed.
With electric service, a family or business that places demands on the electric grid, for example, to run a a high-level, energy-intensive mainframe computer or a whole-house air conditioner, even for short periods of time, would require more capacity from the electricity grid during those periods of peak demand than would a household or business that did not have such energy-demanding equipment. Even businesses or homes that used more electricity overall wouldn't place the same kind of demand on the electric grid, because most electricity systems are capable of handling a normal demand load from their customers.
A demand meter measures the peak level of demand over a set period of time, sometimes as brief as 15 minutes, rather than measuring the overall level of electricity use. The electric company sets the billing level based on the electricity consumption during the period of peak demand. This allows the company to recoup the cost of maintaining the capacity to provide intensive bursts of electricity to those customers who need it while also maintaining affordable prices for their customers who have more consistent electricity needs or who demand less electricity overall.