Demand ratchet clauses can keep your billed demand above your actual monthly peak long after a high-demand event. Under an 80% ratchet with an 11-month look-back, a 30 kW peak can establish a 24 kW billing floor for the next 11 billing periods, even when your measured demand falls below that level. The peak month plus those following periods creates a potential 12-bill impact—not a universal rule that every customer pays the full annual peak all year. Your utility’s applicable tariff determines the percentage, historical demand basis, exceptions, and affected charges.
Demand Charges With and Without an 80% Ratchet
The comparison below is a hypothetical U.S. commercial billing example, not an actual utility rate or a national benchmark. It assumes one 30 kW peak month, followed by 11 months at 10 kW, with a constant demand-charge rate of USD 15 per kW per month.
| Decision item | Without a historical ratchet | With an 80% historical ratchet |
|---|---|---|
| Measured demand in the peak month | 30 kW | 30 kW |
| Measured demand in each following month | 10 kW | 10 kW |
| Historical look-back | None in this example | Previous 11 billing months |
| Billed demand in the peak month | 30 kW | 30 kW |
| Billed demand in each following month | 10 kW | 24 kW |
| Demand charge in the peak month | USD 450 | USD 450 |
| Demand charge in each following month | USD 150 | USD 360 |
| Demand-charge subtotal across 12 bills | USD 2,100 | USD 4,410 |
| Additional cost attributable to the ratchet | USD 0 | USD 2,310 |
| Conditions needed for this comparison | No other demand minimum or adjustment | No older higher peak, no new higher peak, and no other controlling minimum |
| Authoritative billing reference | Applicable utility tariff and supply agreement | Applicable utility tariff’s billing-demand and ratchet provisions |
These totals cover only the modeled demand-charge component. They exclude energy charges in kWh, customer charges, taxes, riders, and other bill items. Keeping those components separate makes it possible to identify the ratchet’s cost without mistaking it for the total electricity bill.
How Demand Ratchet Clauses Work
A demand charge prices a power requirement, usually expressed in kW, rather than total electricity consumption in kWh. A ratchet adds a historical minimum to that calculation: the utility compares the current billing period’s demand with a percentage of a specified historical peak and uses the larger applicable value. DOE’s Federal Energy Management Program describes this look-back method for both time-of-use and non-coincident demand charges.
For a simple measured-demand ratchet:
[
B_m=\max\left(D_m,\ rH_m\right)
]
where:
- (B_m) = billed demand for the current billing month, in kW.
- (D_m) = current month’s measured demand under the tariff’s definition, in kW.
- (r) = ratchet percentage expressed as a decimal.
- (H_m) = highest qualifying demand within the tariff’s historical look-back, in kW.
The monthly charge for that component is:
[
C_m=B_m\times R_m
]
where (R_m) is the applicable demand-charge rate in USD per kW for that billing month.
This formula is a starting model, not a substitute for the tariff. Some schedules add contract-demand minimums or other billing floors. National Grid’s Upstate New York business rate descriptions, for example, identify contracted-demand minimums and ratchet provisions for applicable service conditions.
Why Utilities Use a Historical Floor
A facility may require substantial delivery capacity during a short seasonal or operational peak, even if its demand is much lower during the rest of the year. Ratchets help utilities recover the cost of keeping that capacity available for customers with large swings in demand. That explains why reducing this month’s electricity use does not necessarily remove a demand minimum established by an earlier peak.
DOE’s Better Plants billing guide describes 70%–80% as a usual range in its educational explanation. That range is only a reference starting point—not your account’s percentage, a nationally applicable requirement, or a substitute for the local tariff.
Read the Tariff Before Calculating the Cost
The controlling provision may appear under “Billing Demand,” “Determination of Demand,” or “Minimum Demand,” rather than in a section explicitly titled “Ratchet.” Read the demand definition together with the charge table and applicable riders; a percentage alone does not reveal the entire billing calculation.
| Tariff detail to identify | What to record | Why it changes the result |
|---|---|---|
| Account’s rate schedule | Schedule name, service voltage, and eligibility conditions | A clause from another customer class may not apply |
| Ratchet percentage | Exact percentage for the affected charge | Determines the historical billing floor |
| Historical demand basis | Measured, adjusted, or previously billed demand | Determines which historical values enter the calculation |
| Look-back period | Exact number of preceding billing periods or specified seasonal months | Determines when a peak enters and leaves the calculation |
| Demand measurement | Interval length, qualifying hours, and units | Determines which recorded load event becomes billing demand |
| Other minimums | Contract-demand or fixed-demand floors | Another minimum can remain controlling after the ratchet expires |
| Affected charge components | Each delivery, supply, or other demand-based component | Different components may use different demand definitions |
| Exceptions and adjustments | Seasonal exclusions, power-factor rules, or other stated provisions | Can change eligibility or the historical demand value |
| Effective date | Date on the applicable tariff sheet or rider | Determines which rule and rate apply to the bill being checked |
For an authoritative U.S. example available as of October 12, 2026, AEP Texas’s published retail delivery tariff contains an 80% ratchet referencing demand established in the 11 months preceding the current billing month. The relevant provisions also state that the 80% ratchet does not apply to Retail Seasonal Agricultural Customers. Those are AEP Texas provisions—not rules for every Texas utility or every commercial account.
Use the AEP Texas official rate page to locate its published tariff; the page identifies a September 29, 2026 effective tariff package. Check the applicable individual sheet and rider dates rather than assuming every provision in the compiled document first took effect in 2026.
Check the Demand Interval, Not Just Equipment Ratings
The relevant peak is the demand recognized by the meter and tariff, not automatically the sum of equipment nameplate ratings or an instantaneous startup reading. National Grid’s Upstate New York business rate descriptions provide one example: applicable distribution delivery demand uses the highest demand measured over any 15-minute interval during the month, subject to stated minimums and ratchet conditions.
Under a hypothetical 15-minute average-demand method, 7.5 kWh consumed in the qualifying interval corresponds to:
[D=\frac{7.5\text{ kWh}}{15/60\text{ h}}=30\text{ kW}]
That calculation helps connect interval energy data to demand. It does not establish your meter’s interval alignment, rolling-window method, or tariff definition.
Hand Calculation: One 30 kW Peak Across 12 Bills
This example models a hypothetical U.S. commercial account. All inputs below are assumptions chosen to make the calculation reproducible; none is an official local rate.
Inputs and Assumptions
| Input | Assumed value |
|---|---|
| Peak-month measured demand | 30 kW |
| Measured demand in each of the next 11 months | 10 kW |
| Ratchet percentage | 80% |
| Look-back | Previous 11 billing months |
| Demand-charge rate | USD 15/kW per month |
| Older qualifying demand | No value above 10 kW |
| Additional demand minimums | None |
| New higher peaks during the example | None |
| Modeled charge components | One demand-charge component |
The stable 10 kW demand in later months isolates the historical floor’s effect. If actual monthly peaks vary, calculate each bill separately instead of multiplying one monthly amount by 11.
Calculate the Floor and Annual Difference
1. Calculate the ratchet floor created by the peak:
[30\text{ kW}\times0.80=24\text{ kW}]
2. Calculate the peak month’s demand charge:
[\max(30,\ 0.80\times10)\times15
=30\times15
=\text{USD }450]
3. Calculate each following month’s charge while the 30 kW peak remains in the look-back:
[\max(10,\ 24)\times15
=24\times15
=\text{USD }360]
4. Calculate the demand-charge subtotal with the ratchet:
[450+(11\times360)=\text{USD }4{,}410]
5. Calculate the same demand profile without the historical ratchet:
[(30\times15)+(11\times10\times15)
=\text{USD }2{,}100]
6. Isolate the ratchet’s additional cost:
[
4{,}410-2{,}100=\text{USD }2{,}310
]
The USD 4,410 figure is the entire modeled demand-charge subtotal, not the incremental penalty. The USD 2,310 difference is attributable to the historical ratchet in this comparison.
If the account had stayed at 10 kW for all 12 months, its modeled demand charges would have been USD 1,800. Relative to that separate baseline, the 30 kW event adds USD 2,610: USD 300 in the peak month plus USD 2,310 in later ratchet charges. Keeping these comparisons distinct prevents overstating or understating the event’s financial impact.
When the Peak Leaves the Look-Back
Under the example’s “previous 11 billing months” rule, a peak established in billing month 1 remains eligible for the historical calculation in months 2 through 12. In month 13, month 1 has left that window. With every subsequent measured peak at 10 kW, the remaining historical floor becomes:
[0.80\times10\text{ kW}=8\text{ kW}]
Current measured demand is still 10 kW, so billed demand becomes:
[\max(10,\ 8)=10\text{ kW}]
That return to 10 kW depends on the stated assumptions. A later qualifying peak can establish another floor, and a separate contract-demand minimum can continue to control the bill. DOE’s look-back definition and National Grid’s contracted-demand provisions illustrate why both historical demand and other minimums must be checked.
A lower measured peak does not automatically mean a lower billed demand. Under a historical ratchet, the previous peak can remain controlling until it leaves the applicable look-back. Use billing periods—not an assumed January reset—to track that exposure.
Compare Load-Management Options Against the Existing Floor
A load change has immediate demand-charge value only when it reduces the demand value that actually controls the charge. With a 24 kW historical floor, reducing this month’s measured demand from 20 kW to 15 kW leaves billed demand at 24 kW under the simple example formula. Reducing a potential 30 kW peak to 25 kW, however, lowers the current charge and avoids establishing another 30 kW historical peak.
| Hypothetical operating outcome | Billed-demand result under the example | Decision implication |
|---|---|---|
| Current demand falls from 20 kW to 15 kW while the historical floor is 24 kW | Remains 24 kW | No immediate savings on this demand component |
| Current demand falls from 30 kW to 25 kW while the historical floor is 24 kW | Falls from 30 kW to 25 kW | Current-month savings and a lower new historical peak |
| The original 30 kW event is prevented, with demand held at 10 kW | No 24 kW floor is created | Avoids the modeled peak and subsequent ratchet exposure |
| An alternative tariff is available | Requires a separate full-bill calculation | Compare eligibility, energy rates, demand rules, and fixed charges |
Evaluate equipment scheduling, charging schedules, or other load-management changes against qualifying meter intervals rather than monthly kWh alone. For rate comparisons, model the full bill: a schedule with a smaller ratchet is not necessarily cheaper if its energy rates or other charges are higher. DOE recommends evaluating utility rate structures as a combination of energy, demand, and other billing terms.
For a component-level estimate, use the site’s demand-charge calculator with the tariff-derived billed demand and applicable rate, then reconcile the result with the actual bill. Confirm any ratchet handling against the tariff rather than assuming it from the calculator’s output.
Billing-Demand Verification Checklist
Use this checklist before accepting a disputed demand charge or projecting savings from a load-management project.
- Match the tariff schedule to the account’s customer class and service conditions.
- Record the applicable tariff-sheet and rider effective dates.
- Obtain demand history covering the complete look-back and the bill under review.
- Separate measured demand from billed demand.
- Confirm whether the historical basis uses measured, adjusted, or previously billed demand.
- Verify the ratchet percentage, qualifying months, and expiration period.
- Check contract-demand floors and stated exceptions.
- Apply each charge component’s own demand definition and rate.
- Keep energy charges, fixed charges, taxes, and riders separate from the ratchet comparison.
- Ask the utility or billing provider to identify the controlling tariff provision if the calculation does not reconcile.
This analysis estimates billing consequences; it is not a guaranteed saving or an approved electrical design. Any equipment or control changes still require appropriate professional evaluation, manufacturer instructions, applicable NEC requirements, and local authority having jurisdiction requirements.