A demand ratchet is a tariff clause that bills your demand charge against a percentage of your highest peak over the trailing 11–12 months — not just the current month's peak. So a single high-demand month sets a floor that follows you for up to a year, and you keep paying against that floor even in months when your actual demand was far lower. It's why a facility can use almost no power in a quiet month and still see a large demand charge it can't explain.

This guide shows exactly how a ratchet is calculated with a worked example, why it exists, and the levers that actually get you out from under one.

#What a demand ratchet does, in one example

The mechanics are easier to see with numbers than with definitions. Take a tariff with an 80% ratchet and a demand rate of $18/kW.

Month Actual peak demand Billable demand Demand charge
June 300 kW 300 kW $5,400
July 500 kW 500 kW $9,000
August 280 kW 400 kW (80% of 500) $7,200
September 250 kW 400 kW (80% of 500) $7,200
October 220 kW 400 kW (80% of 500) $7,200

In July the facility spiked to 500 kW — one hot afternoon, every cooling system running at once. From August onward, actual demand dropped back to its normal 250–280 kW range. But the ratchet sets billable demand at 80% of the highest peak in the trailing window — 80% of 500 kW = 400 kW — so the facility is billed on 400 kW every month even though it never draws close to that again.

The cost of that single July spike isn't the $9,000 July charge. It's the extra ~$2,500/month the facility pays from August through the following June, because every quiet month is billed at 400 kW instead of its real ~270 kW. One afternoon of poor peak management can cost $25,000+ over the ratchet window.

#Why ratchets exist

The ratchet isn't an arbitrary penalty. The utility sizes its infrastructure — transformers, lines, substation capacity — to serve your peak demand, and that capacity has to sit ready whether or not you use it. If a facility hit 500 kW once and then dropped to 250 kW, the utility still built and maintained the 500 kW of capacity. The ratchet recovers the cost of standby capacity the facility demonstrated it might need again.

That's also why ratchets cluster on tariffs for facilities with variable load — manufacturing, cold storage, agriculture, anything with seasonal or intermittent heavy equipment. Steady-load customers rarely trigger them.

#How to read a ratchet clause on your tariff

Ratchets vary in three parameters, and you need all three to know your exposure:

  • The percentage. Commonly 80–100% of the peak. A 100% ratchet means a single peak sets your floor at full value for the whole window — the most punishing version.
  • The lookback window. Usually 11 or 12 months. Some tariffs use a shorter seasonal window (e.g. the ratchet only looks back at summer peaks).
  • The trigger basis. Whether the ratchet keys off non-coincident demand (your own peak) or coincident demand (your peak during the utility's system-peak hours). Coincident-based ratchets only ratchet on peaks set during specific windows.

The clause is in the tariff schedule, not always on the bill itself — which is why a ratcheted charge often looks unexplained when you only have the bill in front of you. To find where the demand charge prints and how to spot a ratchet at work, see how to read a commercial utility bill.

#How to avoid or reduce a demand ratchet

Because a ratchet is set by a single historical peak, the entire game is preventing or capping that peak — and, once you're in one, managing your way out as the window rolls forward. The levers:

  1. Prevent the spike in the first place. The cheapest ratchet is the one never triggered. Sequencing equipment startups, staggering heavy loads, and avoiding simultaneous demand events keeps a one-off peak from setting a year-long floor. A facility that knows it's on a ratcheted tariff manages its peak differently than one that isn't.
  2. Peak shaving with storage. A battery discharging into the peak interval caps the demand the utility records — which means it caps the peak that sets the ratchet. This is the strongest structural defense: it protects every future month in the window, not just the current bill. It's a large part of why ratcheted tariffs make the storage economics work.
  3. Wait out the window — deliberately. A ratchet floor expires when the peak that set it rolls out of the lookback window. If a July spike set your floor, it falls off the following July (on a 12-month window). Knowing exactly when relief arrives lets you plan around it rather than assuming the high charge is permanent.
  4. Request a tariff review. A facility persistently over-ratcheted relative to its real load may be on the wrong tariff. Sometimes a different rate class without a ratchet, or with a lower percentage, fits the load profile better — worth checking before assuming the charge is fixed.

What doesn't help: reducing total energy use. A ratchet keys off the peak, not the volume, so a facility can cut its kWh substantially and see no change in the ratcheted demand charge.

#Why ratchets matter for solar and storage savings

For anyone modeling or verifying a C&I storage project, the ratchet is one of the most underestimated parts of the savings case. Peak shaving doesn't just lower this month's demand charge — by capping the peak, it lowers the floor for every subsequent month in the ratchet window. A savings model that scores demand reduction only against the current month understates the value, because it misses the compounding effect on the ratchet.

It also makes savings harder to measure correctly. To know what a battery actually saved on a ratcheted account, you have to compare the actual demand charge against a counterfactual that applies the ratchet the way the tariff does — which means reconstructing the bill against the real tariff, not estimating from a demand rate. That reconstruction is the core of solar-and-storage savings verification.

#What Tariform does

Tariform is a utility-bill intelligence platform. Ratchets are exactly the kind of tariff detail that gets lost when bills are read by hand or estimated from a rate.

Extract turns utility-bill PDFs into line-itemized, tariff-aware data — the demand component broken out and mapped to its tariff role, reconciled against the bill total — so the figures feeding a pro-forma or proposal reflect the actual tariff structure.

Verify is for C&I solar-and-storage operators proving what each system saved. Because the counterfactual bill is reconstructed against the tariff actually in effect — ratchet included — the demand savings it reports capture the full effect of peak shaving across the ratchet window, not just the current month.

If your savings or baseline numbers need to handle ratchets correctly, book a demo — twenty minutes, a real bill, you see the output.

#FAQ

If I cut my peak this month, when does the ratchet floor actually come down?
Not immediately. The floor is set by the single highest peak still inside the lookback window, so it only drops when that peak ages out — not when you start managing demand. Shaving your peak today keeps a future month from setting a new floor, but an existing floor persists until the spike that set it rolls off (a July peak on a 12-month window clears the following July).
Is the floor based on my actual metered peak, or the already-ratcheted billed demand?
Your actual metered peak. The ratchet keys off the real demand recorded in each month, not the ratcheted amount you were billed — otherwise the floor would compound on itself indefinitely. Each cycle the utility re-scans your true interval peaks across the window and takes the highest.
Can I get a one-time spike removed from the ratchet?
Sometimes. Some utilities will adjust a floor set by a documented anomaly — an equipment fault, a one-off commissioning test, a metering error — if you call and make the case. It isn't guaranteed and it won't happen on its own, but it's a tariff-administration question worth raising rather than treating the floor as fixed.
How can I tell a ratchet is in play if it isn't labeled on the bill?
Compare the billed demand to your actual metered peak for the month. If the billed kW is higher than the highest interval you actually drew, you're paying against a floor, not this month's demand. The clause itself lives in the published tariff schedule, not usually on the bill face.
Does a ratchet roll month to month, or reset once a year?
Most are rolling: each month looks back over the trailing 11–12 months, so the floor updates continuously as old peaks expire and new ones enter. A few tariffs use a fixed seasonal or annual window instead. The lookback type is one of the three parameters to confirm in the clause.
How do I quantify what a ratchet is actually costing me across the year?
Compare each month's billed demand against what you'd have paid on that month's true peak, summed across the window — the gap is the ratchet's cost. Doing that correctly means reading the demand line and the tariff's ratchet clause off every bill, which is what Extract and bill-level savings verification do.