Demand Ratchets Explained: What Indiana Commercial and Industrial Operators Need to Know

A demand ratchet is a billing mechanism that ties your minimum monthly electric bill to a peak you may have hit months ago — not what you're actually pulling from the grid today. If you're a plant manager, facility director, COO, or superintendent looking at an electric bill where metered demand and billed demand are two different numbers, the demand ratchet is almost certainly the reason — and it is costing you more than most operators realize.

This post is Part 1 of a two-part series. Here, we cover the mechanics: what a demand ratchet is, how it gets calculated on your bill, why utilities use it, and the specific numbers you need to start tracking. Part 2 covers demand budgeting, monitoring, and how to connect this information to scheduling and operations.

By the end of this post, you'll understand exactly how the ratchet floor gets set, why reducing kilowatt-hour usage won't fix it, and the questions you can bring into your next finance and operations meeting.

Watch this episode of The TEG Podcast on demand ratchets on YouTube.

What a Demand Ratchet Actually Is

A demand ratchet is a billing method that utilities apply to larger commercial and industrial customers. Instead of billing you based solely on your highest demand this month — and then resetting next month — the ratchet looks back at your highest recorded peak over a defined window and uses a percentage of that number as the minimum demand they will bill you for going forward.

Demand is measured in kilowatts (kW). It reflects the highest capacity you asked the grid to deliver during the highest 15- or 30-minute interval in a billing period. Without a ratchet, the utility finds that interval for the month, multiplies it by the demand rate, and that is your demand charge. Next month, it starts fresh.

With a ratchet, two numbers are compared every single month:

• Your actual metered peak demand in the current billing period.
• A percentage of the highest peak demand from a defined look-back window — often the prior 12 months, a summer season, or another period defined in your tariff.

Your billed demand is whichever number is higher. That's the entire mechanism.

A common setup works like this: the utility takes the highest demand you've hit over the last 12 billing periods, multiplies it by a ratchet percentage — say 75% or 80% — and that product becomes the minimum demand they will bill you for in future months. If you hit a peak of 1,000 kW once, and the ratchet is 75%, your minimum billed demand is 750 kW until either a new higher peak replaces it, or that old peak drops out of the look-back window.

You could run at 500 kW every month after that. The meter will honestly show it. But the bill will still reflect 750 kW of billed demand.

That gap — between what you're actually drawing this month and what you're being billed for because of something that happened months ago — is where ratchets do their damage.

Why the Demand Ratchet Exists on Paper vs. How It Works in Real Life

From the utility's perspective, the demand ratchet is about infrastructure cost recovery. To serve large commercial and industrial facilities, the utility has to invest in transformers, substations, and generation assets capable of handling your maximum possible load. When your facility creates a high demand event, the meter records it. To the utility, that number is a statement: this customer is capable of placing this much load on our grid. The ratchet is the billing mechanism that says, since you've proven you can hit that level, we're going to assume you might do it again — and we're going to recover the cost of keeping that capacity available for you, even in months where you don't reach it.

On paper, that is a defensible objective. In practice, it assumes something that is not true in most facilities: that operators have a working understanding of their tariff, live visibility into their demand, and a direct connection between that information and their scheduling and operational decisions.

Most operators don't have that. They're making product, keeping people safe, and hitting production targets. The ratchet shows up as a line on the bill — two lines, actually — and there is rarely anyone whose job it is to translate the rate book into plant-floor decisions.

That is what I call the energy system gap. Physically, it's the small space between the utility meter on the wall and your main distribution panel. Jurisdictionally, it's the gray zone where no one owns the responsibility of translating rate language into operational behavior. On one side of that gap are utilities and rate designers. On the other side are you and your team. Three things are usually missing in that gap: real-time data, an understanding of the rate mechanics, and any connection between the two.

Demand ratchets sit directly in that gap, and they are a near-perfect example of how a theoretically rational billing mechanism becomes a very expensive burden the moment operators aren't actively managing it.

When the Demand Ratchet Clearly Hurts Facilities Like Yours

This is not a symmetric situation. There is no common scenario where a demand ratchet helps an operator. What it does is punish specific operational patterns — some of them entirely reasonable.

One-time peaks from necessary events. Commissioning new equipment, running a full load test on backup systems, a short production push — these are sometimes required. Under a ratchet, any one of those intervals can set a high peak that drives your minimum billed demand for the next 12 months. The event was justified. The billing consequence follows you for a year.

Seasonal and intermittent operations. If your facility runs hard during one quarter and lightly the rest of the year — cold storage, agricultural processing, and some manufacturers fit this pattern — a ratchet can turn that one intense period into a year-round demand floor. You can end up paying demand charges based on a summer peak during months when your actual load is a fraction of that number.

Operations that have genuinely reduced their demand. If your facility has made changes — process improvements, equipment upgrades, operational shifts — that legitimately reduced your peak, the ratchet may mean you're still paying as if none of that happened, until the old peak ages out of the look-back window.

Facilities without interval data visibility. If no one in your organization is watching your load profile in real time or near-real time, you have no ability to avoid demand events before they happen. The ratchet is invisible until the bill arrives.

Variations: The Type of Ratchet Shapes the Pattern of Your Pain

Not all ratchets work the same way, and the type you're under affects how you experience it.

Monthly ratchets use a rolling window of prior months — often the previous 11, creating a 12-month window. Each month, your billed demand is the greater of this month's metered peak or a percentage of the highest peak in the prior 11 months.

Seasonal ratchets look specifically at peak demand during a defined season — typically summer months — and then apply a percentage of that seasonal peak as the minimum billing demand for non-summer months. For facilities with heavy seasonal operations, this is particularly punishing.

Annual ratchets set a minimum based on the highest peak in a defined 12-month period, and that minimum applies for the entire following year. Every month's billed demand is the greater of the metered demand or that annual ratchet floor.

Understanding which type you're under — and the exact look-back window — determines how long a given peak will follow you and when you can realistically expect a reset.

Vendor Pitches, Red Flags, and Questions That Smoke Out BS

There is a narrative that sometimes appears in energy articles and vendor proposals that says demand ratchets are beneficial because they incentivize customers to manage demand carefully. That argument assumes that operators have deep, active tariff knowledge, live access to their demand data, and the ability to translate that into scheduling decisions in real time. Most don't, and it's not because they're unsophisticated — it's because that's not their job. Their job is manufacturing, healthcare, education, or municipal operations.

What to watch for in vendor conversations:

• Proposals that model demand savings without your actual tariff. If a vendor is estimating what a project will do to your demand charges without running your specific ratchet percentage and look-back window against your actual billing history, their number is a guess.
• Promises that reducing kilowatt-hour usage will solve your demand charge problem. It won't. Energy (kWh) and demand (kW) are different line items. You can lower consumption significantly and still create a high peak demand in one 15-minute interval. A consultant's memo does not change what happens on the plant floor unless it is connected to real operational decisions.
• Projects that claim ratchet savings without accounting for the timing of your look-back window. If your current ratchet minimum is driven by a peak from eight months ago and the look-back period is 12 months, that floor is dropping off soon regardless of what you do. A proposal that counts the disappearance of that peak as a project benefit is double-counting.

Questions to ask in any vendor or utility meeting:

• What is our exact ratchet percentage, and where in the tariff does it appear?
• What is the look-back period — and can you show us the specific sentence in the tariff language?
• On last month's bill, what was our metered demand versus our billed demand, and which historical peak is driving that gap?
• Is the savings estimate in this proposal modeled against our actual tariff and billing history, or against an approximation?
• If we implement this project, what specific operational changes are required to avoid resetting the ratchet — and who owns that on an ongoing basis?

What You Can Do This Week

You don't need a project to get started. You need a clear picture of where you stand.

1. Pull your last 12 months of electric bills on your main accounts. Look for two separate demand line items: metered demand and billed demand. If those numbers are different in any month, you have an active ratchet.
2. Find the ratchet language in your tariff. Your utility's rate schedule is a public document. Look for a sentence that reads something like: "Billing demand shall be the greater of the current month's measured demand or X percent of the highest measured demand in the preceding Y months." X is the ratchet percentage. Y defines the look-back window.
3. Identify the historical peak that is currently setting your floor. If your billed demand is higher than your metered demand, something in the look-back window is driving it. Find which month that peak occurred and when it will age out.
4. Map any seasonal or intermittent operations against your demand history. If your busiest quarter is setting a floor for nine months of lighter operations, that is a real and quantifiable cost.
5. Ask who in your organization has real-time or near-real-time visibility into your load profile — and whether that person has any connection to production scheduling. If the answer is no one, that is the starting point.

The Bottom Line on Demand Ratchets

A demand ratchet sets a minimum billing demand based on a percentage of your highest historical peak over a defined window. Every month, your billed demand is the higher of your current metered peak or that ratchet minimum. From the utility side, it's a cost recovery mechanism for infrastructure. From your side, it's almost always a cost adder — one that can make you pay for capacity you aren't actually using, often for months after the event that triggered it.

Reducing kilowatt-hour usage will not fix it. Demand and energy are different. You have to look specifically at the relationship between metered demand and billed demand, understand the ratchet percentage and look-back period in your tariff, and connect that to how your facility actually operates.

You also cannot hand this entirely to a consultant. The decisions that create or avoid high demand events — when to start the extruder, whether to run the compressor while other loads are starting, when to schedule a full load test — are made on the plant floor. A memo does not change that without a persistent connection between the rate book, real-time data, and the people running operations.

Part 2 of this series covers demand budgeting, monitoring, and how to align finance and operations around this. If you're dealing with a ratchet-related decision right now — a project pitch, a rate change proposal, or a demand charge that has gotten out of control — the TEG Energy Decision Blueprint for demand ratchets and demand management walks through your actual tariff and billing history so you know exactly what you're dealing with before you commit to anything.

Frequently Asked Questions: Demand Ratchets

Q: What is a demand ratchet on a commercial electric bill? A: A demand ratchet is a billing mechanism that sets a minimum monthly demand charge based on a percentage of your highest recorded peak demand over a defined look-back period — often the prior 12 months. Each month, you are billed for whichever is higher: your current peak demand or that ratchet minimum. This means a single high-demand event can raise your minimum bill for many months, even if your actual demand is much lower afterward.

Q: How is billed demand different from metered demand? A: Metered demand is the actual highest kilowatt level your meter recorded during the current billing period. Billed demand is the number the utility uses to calculate your demand charge — it will be the higher of your metered demand or the ratchet minimum derived from a past peak. If those two numbers are different on your bill, a demand ratchet is the reason.

Q: How long does a demand ratchet peak follow you? A: It depends on the look-back period in your specific tariff. For a 12-month rolling ratchet, a peak will influence your minimum billed demand until it drops out of that 12-month window — unless a new higher peak replaces it first. Some ratchets are tied to a specific season rather than a rolling window, which affects the timeline differently. Find the exact language in your tariff to know how long your current peak will follow you.

Q: Can I lower my ratchet charges by reducing kilowatt-hour usage? A: No. Kilowatt-hour usage and kilowatt demand are separate line items that respond to different behaviors. Demand is the highest capacity you draw during a short interval — typically 15 or 30 minutes. You can reduce your overall consumption significantly and still create a high peak demand event in a single interval. To address ratchet charges, you have to manage the specific intervals that create peak demand, not just your total usage.

Q: What percentage of a commercial electric bill is demand charges? A: For many commercial and industrial customers, demand charges — including ratcheted minimums — account for 30% to 70% of the total electric bill. When billed demand is kept artificially high by an old peak, the all-in cost per kilowatt-hour ends up far higher than the energy rate printed in the tariff. This is why ratchets are worth understanding even if they appear to be just one line item.

Q: Where do I find the ratchet percentage in my utility tariff? A: Your utility's rate schedule is a public document. Look for a sentence in the demand billing section that reads something like: "Billing demand shall be the greater of the current month's measured demand or X percent of the highest measured demand in the preceding Y months." X is your ratchet percentage. Y defines the look-back period. If you can't locate it, ask your utility account representative to point to the specific tariff language — and ask them to show you the exact sentence, not just a summary.

Watch this episode of The TEG Podcast on demand ratchets on YouTube.