What Is Capacity and Why Am I Being Charged for It in My Business Electricity Bill?

When businesses review their electricity supply costs, one confusing line item often stands out: the capacity charge. Unlike supply or transmission charges, capacity costs don’t seem tied directly to the energy you consume day to day but they still make up a significant portion of your total electricity costs.

So, what is capacity, and why are you being charged for it? Let’s break it down in simple terms.

Understanding Capacity in Commercial Electricity

Capacity refers to the amount of electricity the power grid must have available to meet peak demand—the highest level of usage expected at any time, especially during extreme weather (like hot summer afternoons or freezing winter mornings). The grid must ensure there’s always enough power for every business, factory, or facility to operate—even during demand surges.

You’re not just paying for the energy you use. You’re also helping to pay for the infrastructure and readiness to serve your business at full capacity, even if you don’t always use it.

How Is Capacity Determined?

Your capacity tag (sometimes called a peak load contribution or PLC) is set annually and is based on how much electricity your business used during the grid’s peak demand hours from the previous year. These are often the five highest-use hours on the hottest days of the summer.

Here’s how it works:

• The more your business consumes during those peak hours, the higher your capacity tag.

• Your capacity tag determines your share of the capacity cost for the next year.

So, even if your usage is low now, if you had high usage during those peak demand hours last year, your capacity charges may still be high today.

Why Am I Being Charged for Capacity?

Grid operators, like PJM, ISO-NE, or NYISO, run auctions to secure future electricity generation capacity years in advance. Your electricity supplier then passes the cost of this "reserve power" on to you, based on your individual demand tag.

In short:

• You’re being charged to ensure the grid can handle your maximum demand.

• It's about reliability keeping the lights on and machines running even in extreme scenarios.

Can I Lower My Capacity Charges?

Yes. While you can't eliminate capacity charges completely, you can reduce them by managing when and how your business uses power.

Tips to Reduce Future Capacity Costs:

• Identify peak days: Work with an energy advisor or use demand response alerts to anticipate peak days.

• Curtail usage: Reduce or shift non-essential energy use during those peak hours (e.g., delay production or adjust HVAC).

• Install energy management systems: Automate when to scale back load during peak demand events.

• Consider on-site generation or battery storage: These help lower your demand during grid peaks.

Why Capacity Charges Matter to Your Bottom Line

Capacity can account for 15–30% of your total supply rate especially in regions like Illinois, Ohio, Pennsylvania, and New York. That’s a big chunk of your energy spend that has nothing to do with your day-to-day kilowatt-hour usage.

If you’re only comparing supply rates, you might miss the bigger picture. Two suppliers offering the same energy rate could charge very different amounts for capacity, depending on how they price it.

Should Capacity Be Included in My Supply Contract?

Great question. When comparing electricity suppliers, you’ll often see:

• Capacity Pass-Through: The supplier passes the actual cost to you, based on your tag.

• Capacity Included: The supplier builds your capacity charge into the fixed rate.

Neither is inherently better, but you need to know what you're signing:

• If capacity is included, the fixed rate may seem higher but it could offer more price stability.

• If capacity is pass-through, you’ll get more transparency, but higher risk if your tag increases.

Final Thoughts: Take Control of Your Capacity Costs

Capacity is about preparedness not just usage. Understanding how your business contributes to peak demand helps you avoid surprises on your bill and unlock hidden savings.

Want Help Reducing Your Capacity Costs?

At [Your Energy Company or Broker], we help businesses:

• Analyze their capacity tag

• Choose the right contract structure (pass-through vs. included)

• Prepare for future peak days to lower next year’s charges

Let us help you compare suppliers and reduce capacity-related costs.

Contact us today to learn how your business can lower its electricity costs, not just by shopping the supply rate, but by managing demand intelligently.