The same tariff and the same peak cost a flat data centre load a third of what they cost a peaky one, until a ratchet sets the bill.
A demand charge per MWh equals the demand rate times 1,000, divided by the load factor times the hours in the month. At $12 per kW-month on a 100 MW peak, the charge is $17.54 per MWh at a 95 per cent load factor and $55.56 at 30 per cent: the same tariff and the same $1.2 million monthly bill, spread over 3.2 times fewer megawatt-hours. A ratchet that bills 80 MW while the campus draws 40 doubles the 95 per cent figure to $35.09.
Worked in full in The Data Center Development Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Large-load electricity tariffs split the bill in two. The energy charge pays for megawatt-hours consumed. The demand charge pays for the highest kilowatt draw in the billing period, whether that peak lasted fifteen minutes or the whole month. A data centre, which runs close to flat around the clock, is the customer the demand charge favours most, and the reason a utility treats a data centre differently from a factory on the same tariff.
| Input | Value |
|---|---|
| Demand charge, $ per kW-month | 12 |
| Peak demand, MW | 100 |
| Hours in the month | 720 |
| Energy charge, $ per MWh, illustrative | 45 |
| Ratchet, share of the highest recent peak | 80% |
The monthly demand charge is fixed by the peak: 100,000 kW at $12 is $1,200,000. Energy delivered is the peak times the load factor times the hours. Dividing one by the other converts the demand charge into a cost per megawatt-hour, which is the unit a tenant or a power purchase agreement actually compares.
Monthly demand charge = peak kW × rate = 100,000 × $12 = $1,200,000
Energy = peak MW × load factor × hours = 100 × 95% × 720 = 68,400 MWh
Demand charge per MWh = 1,200,000 / 68,400 = $17.54
In closed form: rate × 1,000 / (load factor × hours). In Excel, with the rate in B1 and the load factor in B2: =B1*1000/(B2*720).
The closed form shows the mechanism. At a 100 per cent load factor the demand charge is $16.67 per MWh, its floor. Everything below 100 per cent divides that floor by the load factor, so the per-unit cost rises hyperbolically as the load becomes peakier.
| Load factor | MWh in the month | Demand charge, $/MWh | All-in, $/MWh | Demand share |
|---|---|---|---|---|
| 30% | 21,600 | 55.56 | 100.56 | 55% |
| 50% | 36,000 | 33.33 | 78.33 | 43% |
| 70% | 50,400 | 23.81 | 68.81 | 35% |
| 85% | 61,200 | 19.61 | 64.61 | 30% |
| 95% | 68,400 | 17.54 | 62.54 | 28% |
Same tariff, same peak, different business. A stabilised data centre at 95 per cent pays $62.54 all-in. A 30 per cent load factor customer on the identical tariff pays $100.56, of which more than half is demand charge. The gap of $38.01 per MWh is entirely the cost of holding capacity that sits idle most of the month. For the data centre the demand charge is $14.4 million a year, a cost it can budget almost exactly, because its peak and its average are nearly the same number.
The flatness that makes the demand charge cheap per unit also makes it unavoidable. A peaky load can shave its peak; a flat one has no peak to shave. Every 5 MW of peak a site does remove is worth $60,000 a month, $0.72 million a year, at this rate, which is why load management matters during commissioning and ramp, when the load is not yet flat.
Most large-load tariffs carry a ratchet: billing demand is the higher of the current month's peak and a percentage, commonly 80 or 90 per cent, of the highest peak over the previous months. The ratchet is where a data centre's load factor quietly collapses.
Suppose a full-load test or an early burst sets a 100 MW peak, and the campus then runs at 40 MW with a 95 per cent load factor while tenants ramp. Billing demand is 80 MW, not 40. The monthly demand charge is $0.96 million, of which $0.48 million is charged on capacity nobody used. Measured against billing demand, the effective load factor is 47.5 per cent, and the demand charge per megawatt-hour is $35.09 against $17.54 without the ratchet.
| Case | Billed MW | MWh | Demand charge, $/MWh |
|---|---|---|---|
| No ratchet | 40 | 27,360 | 17.54 |
| 80% ratchet on a 100 MW peak | 80 | 27,360 | 35.09 |
The companion workbook takes this further as a worked case: a commissioning test at the campus's full contracted capacity, with the ratchet setting the bill for months afterwards.
The common error is to model power cost as a single blended price per MWh taken from a stabilised comparable, then apply it to every month of the project. That price embeds a 95 per cent load factor. During energisation, commissioning and lease-up the load factor against billing demand is far lower, and if a ratchet is live it can stay low for most of a year. A pro forma that carries $62.54 through the ramp understates power cost exactly when the project has the least revenue to absorb it. Model demand and energy separately, track billing demand month by month with the ratchet, and only then divide by megawatt-hours.
The second error runs the other way: comparing a data centre's power cost with an industrial benchmark on the same tariff and concluding the site is cheap. It is cheap per unit because the load is flat, not because the tariff is generous.
Divide the demand rate by load factor times hours. At $12 a kW-month a flat 95 per cent load pays $17.54 per MWh of demand charge, a 30 per cent load $55.56, and a ratchet can double the flat figure while the campus ramps. The question book and the ratchet case in the free workbook for this book work the same tariff; for how the hottest hour sets leasable capacity on a fixed connection, see how PUE limits leasable capacity.
Load factor is average demand divided by peak demand over the billing period. A stabilised data centre runs close to flat, around 95 per cent in this illustrative case, so 100 MW of peak delivers 68,400 MWh in a thirty-day month. The higher the load factor, the more megawatt-hours share the fixed demand charge, which falls to $17.54 per MWh at $12 per kW-month.
A ratchet bills demand at a share of the highest recent peak, often 80 or 90 per cent. If a test sets a 100 MW peak and the campus then draws 40 MW, an 80 per cent ratchet bills 80 MW. The monthly demand charge is $0.96 million instead of $0.48 million, and the cost per MWh doubles from $17.54 to $35.09.
At a 100 per cent load factor the demand charge per MWh is the rate times 1,000 divided by the hours in the month. At $12 per kW-month over 720 hours that floor is $16.67 per MWh. Any load factor below 100 per cent divides the floor by the load factor, so at 50 per cent it is $33.33.
The demand charge against load factor is a Chapter 8 calculation in The Data Center Development Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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