Capacity charges are one of the more opaque components of a commercial electricity bill, yet they can represent a significant share of your all-in cost. Understanding how they're set reveals a powerful, often-overlooked opportunity to save.
What capacity charges pay for
To keep the lights on during the highest-demand moments of the year, grid operators must ensure enough generation is available — plus a reserve margin — even if some of it runs only a few hours annually. Capacity charges recover the cost of maintaining that standby capability.
How your capacity charge is set
In many markets, your capacity obligation is based on your usage during a small number of system peak hours in the prior year — sometimes called your capacity tag or Installed Capacity (ICAP) tag. That tag can then apply for the following delivery year.
Because a few peak hours can define your capacity cost for an entire year, reducing usage during those specific windows is uniquely valuable.
Managing capacity costs
The strategy is to reduce load during the hours most likely to set the system peak — typically the hottest afternoons of summer in many regions. Predicting and curtailing during these windows (peak shaving) can lower your capacity tag for the following year.
- Monitor peak-day forecasts and alerts.
- Curtail non-essential load during likely peak intervals.
- Use on-site storage or generation to reduce grid draw at peaks.
Common mistakes
- Not realizing capacity is driven by a handful of hours, not total usage.
- Ignoring peak-day alerts that signal curtailment opportunities.
- Focusing only on the commodity rate and missing capacity savings.
