What are electricity demand tariffs?

Fact Checked

The way we pay for electricity is changing, and perhaps not for the better. ‘Demand tariffs’ are now available to most Australian residents and small business customers, and while energy retailers have been quick to 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, retailers have been able to offer them to residential and small business customers too. Not only are retailers offering them, but it seems some will be actively encouraging customers to switch to them.

Demand tariffs are very different to how most of us are used to paying for electricity. If you have a comfortable knowledge of electricity and how your home uses it, then a demand tariff could save you money. If not, it could cost you big time. Learn the ins and outs on an electricity demand tariff with Canstar Blue.

What is a demand tariff?

A demand tariff is comprised of standard electricity supply and usage charges, as well as an additional 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 interval during this time window 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 are also different in ‘summer’ (December-March) and ‘winter’ (April-November). Typical rates are anywhere from 30c per kW/day to 40c per kW/day in summer, and from 8c per kW/day to 20c per kW/day in winter.

How does a demand charge work?

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 a demand tariff

There are a few advantages to being on a demand tariff for your electricity usage. These include:

• 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. in that they 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 a demand tariff

As much as a demand tariff can help to save customers money and reduce strain on the grid, there are also a few disadvantages to using them for electricity usage too:

• 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.

Demand tariffs in Australia

While demand tariffs 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 uptake is 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.

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 even moved more towards demand-pricing to aid with energy grid strain, which 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 a demand tariff save me money?

In short, it seems unlikely. 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 power usage to avoid spikes.

There are plenty of electricity usage monitors and monitoring apps with live usage information to help customers track their usage. Some apps can even send you alerts when usage gets out of hand. With that said, not many of us are engaged enough with electricity to monitor our usage this closely. Even if you are, it’s difficult to say whether any possible savings are worth the additional effort and the risk of blowing out your budget when it gets really hot and you’re forced to use lots of energy.

How to reduce 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 optimizing 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 and avoid running a higher energy usage during demand time. It might also be more financially beneficial to avoid using multiple energy draining appliances at the same time during your allocated demand charge time period. Perhaps run your dishwasher first and then your washing machine in the evening instead of running both at the same time.

Does electricity cost more at night?

Typically, on any kind of demand or time of use tariff, the peak time time will run into the evening, meaning that your electricity will probably cost more at night than it does in the day time. That being said, this is usually only until 9pm, so if you have the means to leverage your energy usage after 9pm 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 don’t use much electricity between the hours of 3pm and 9pm on weekday, there is still the large risk factor that comes along with incidental extra energy usage. Especially in warmer parts of the country where energy usage is critical for cooling the home, there may be little to no benefit for going on a demand tariff as you may just end up coping higher bills.

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 though, it doesn’t hurt to compare providers and plans regularly to ensure you’re still getting a good deal on electricity. Our free comparison tool allows you to compare a range of providers across a variety of criteria, from prices and to green energy options. To start your search, click the banner below and type in your postcode.