Electricity demand tariffs explained

Fact Checked

In this article, Canstar Blue discusses electricity demand tariffs and how they work in Australia.

‘Demand tariffs’ (also called ‘demand charges’) are now available to most Australian residents and small business customers, and while energy retailers boast the advantages of them, whether or not consumers stand to benefit is much less clear. Demand tariffs have traditionally been used in large business, but as of 2017, energy retailers have been able to offer them to residential and small business customers too. Not only are retailers offering demand tariffs, but it seems some actively encourage customers to make the switch.

However, demand tariffs are very different to how most of Australian energy customers pay for electricity. Discover the ins and outs of an electricity demand tariff with Canstar Blue.

Electricity demand tariffs explained

A demand tariff is a pricing structure designed by energy distributors to lessen the strain on the electricity grid during peak usage times. It incentivises energy customers to use less energy during times when demand is high. Customers will need to have a smart meter to qualify for this tariff.

A typical energy plan is comprised of two types of charges: supply charges and usage charges. However, if you’re on a demand tariff, you’ll also be charged a third fee called a ‘demand’ or ‘capacity’ charge.

The demand charge reflects a household’s maximum electricity usage, typically between 3pm and 9pm on weekdays. Your highest energy usage over a 30-minute intervals is then used to calculate the demand value. This is then multiplied by your network’s daily demand charge rate to calculate the total cost of the demand tariff. The peak usage resets each month in most cases, meaning you only need to hit your peak once for that demand rate to apply every day for the entire month.

Demand charges vary across different electricity distributors and retailers. Demand charges may also be different in ‘summer’ (November-March) and ‘winter’ (June-August).

How often is my demand charge reset?

The majority of residential customers will have their demand tariffs recalculated on a monthly basis, so your highest usage this monthly billing won’t carry over to the next. However, some regions may use seasonal demand resets (recalculated at the start of each season) or annual demand resets (recalculated at the end of each year).

What is the maximum demand charge?

For an illustration on how demand charges works, we’ll run you through an example based on the below sample from an old energy price fact sheet. Let’s say a household in summer (between 3pm and 9pm) usually runs a fridge, TV and a few lights at the same time.

The maximum amount of electricity it draws from the grid at any one moment is 3kW. The demand charge would therefore be 101.904 cents (3kW x 33.968c) for each day of the month. This is on top of standard electricity usage and supply charges.

Now let’s assume that one evening this household runs the TV, lights, fridge, air conditioner, dishwasher and cooktop all at the same time, drawing 7kW of electricity from the grid at once. This now becomes the new peak demand, and a demand charge of 237.776 cents per day (7kW x 33.968c) would be applied every day, again for the entire month.

It’s important to keep in mind though that in order to access a demand tariff or charge, a smart meter is required. If your premise does not have a smart meter installed, you will only have access to a flat rate.

Advantages of an electricity demand tariff

There are some advantages to being on a demand tariff for your electricity usage, including:

• Lower usage rates: Electricity usage rates with demand tariffs are considerably lower than usage rates on a single rate tariff – usually by about 4c/kWh. But, you have to ensure your electricity usage is stable in order to take the most advantage of this.
• Encourages energy efficiency: Demand tariffs are similar to time of use tariffs. Both tariff types encourage customers to spread their electricity usage over time, rather than all at once.
• Alleviates stress on the grid: By making use of peak and off peak times for electricity usage, more customers will begin to change their energy habits in order to save the most money. This means that less households and businesses will look to consume their energy during peak times, when strain on the grid is high.

Disadvantages of an electricity demand tariff

As much as a demand tariff can save customers money and reduce grid strain, there are also disadvantages to using them for electricity usage.

• Can cause higher bills: Demand tariffs are incredibly punishing on households that let their electricity usage slide for even a moment. Brief spikes in electricity usage between 3pm and 9pm on any given day will leave customers paying a higher price for the entire month.
• Requires a smart meter: While some households and businesses in Australia, particularly in Victoria, already have smart meters installed, the vast majority are still without one, making it difficult for this tariff to be accessed.
• Two charges to keep track of: Unlike other electricity tariffs, a demand tariff requires bill-payers to watch over two separate usage charges for a billing cycle, which could be time consuming or even confusing for some homes and businesses.

Electricity demand tariffs in Australia

While demand charges for electricity are common for large and medium-sized businesses across Australia, they are still yet to make a huge impact on the residential energy market. Most states and territories in Australia do offer a demand electricity tariff to households, but are largely dependent on the access to smart meters in that region. Currently, Victoria is the only state to have rolled out smart meters to all homes and businesses, as it’s the only state to mandate smart meter usage.

The guidelines and availability of a demand tariff also differs between each distribution network in Australia. Some networks, like EvoEnergy in the ACT and Ausgrid in New South Wales, have moved towards demand pricing to aid with energy grid strain. This means that any household or business that has installed a new smart meter may be encouraged to go on a demand tariff for at least 12 months.

For the most part however, customers will only be put on a demand tariff if they explicitly opt in. If you’re approached by your retailer about a demand tariff, it’s best to consider how you use energy and whether you stand to benefit from it before making a decision.

Will an electricity demand tariff save me money?

Demand tariffs are marketed as a great way for customers to save, but the reality is that this requires households to be extremely vigilant in monitoring their electricity usage to avoid price spikes.

There are plenty of electricity usage monitors and monitoring apps with live usage information to help customers track their usage. Some apps can send you alerts when usage gets out of hand. Unfortunately, not many of us are engaged enough with electricity to monitor our energy usage this closely. Even if you are, it’s difficult to say whether any possible savings are worth the additional effort.

How can I reduce electricity demand charges?

If you’re on this kind of tariff and you are looking to reduce demand charges, the best way to do so would be through optimising your energy usage.

• Take advantage of the different times of the day where costs aren’t so high to use some of your more energy-draining appliances, such as clothes dryers or pool pumps.
• Avoid using multiple energy draining appliances at the same time during your allocated demand charge time period: for example, run your dishwasher first, then your washing machine afterwards instead of running both at the same time.
• If you do need to use several appliances in peak demand hours, try to stagger them in 30-minute intervals to avoid your energy use skyrocketing during any half-hour.

Will a demand tariff charge me more for electricity use at night?

Typically, on any kind of demand or time of use tariff, the peak time time will run into the evening. This means that your electricity will probably cost more at night than it does in the day time. This is usually only until 9pm, so if you have the means to leverage your energy usage after this time or during the day, you can avoid these higher costs.

Should I go on an electricity demand tariff?

While a demand tariff can save you money if you use less electricity during peak demand periods, there is still the risk that comes with incidental extra energy usage. There may be little benefit to going on a demand tariff, especially in warmer parts of the country where energy usage is critical for cooling the home.

If you are really keen to monitor your usage and know you can take advantage of the peak and off-peak times, a demand tariff may work for you. However, households like this are still probably better off sticking to a time of use tariff, as it means you avoid the risks that come with demand charges.

No matter what tariff you are on, it doesn’t hurt to compare providers and plans regularly to ensure you’re still getting a good deal on electricity. Canstar Blue’s free energy plan comparison tool allows you to compare a range of energy providers across a variety of criteria, from prices to green energy options.

Compare cheap single-rate electricity plans

Original reporting by Kelseigh Wrigley
Image Source: Crovik Media/Shutterstock