Electricity Demand Tariffs Explained

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The way we pay for electricity is changing, and perhaps not for the better. ‘Demand tariffs’ are now available to Victorian 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 can now offer them to residential and small business customers. Not only are retailers offering them, but it seems some will be actively encouraging customers to switch to them. They will also be made available in New South Wales, Queensland and South Australia in due course.

Demand tariffs require a smart meter, which is why Victoria is so far the only state where they are widely available. 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.

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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 between 3pm and 9pm on weekdays. Your highest energy usage over a 30-minute interval during this window is 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, 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.

For an illustration on how this works, refer to 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.

AGL Demand Tariff Sample

Demand tariff benefits

Electricity usage rates with demand tariffs are considerably lower than usage rates on a single rate tariff – usually by about 4c/kWh. So long as your electricity usage is stable to avoid exorbitant demand charges, this makes it possible for a demand tariff to save you money.

The broader idea behind demand based tariffs is similar to time of use tariffs. They encourage customers to spread their electricity usage over time, rather than all at once. In this way, peak time stress on the electricity grid could be alleviated – hence why the retailers and the energy industry as a whole thinks demand tariffs are the best thing since sliced bread.

Demand tariff disadvantages

Money tied up in Electricity

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. For this reason, 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, carefully consider how you use energy and whether you stand to benefit from it.

Demand tariffs in the rest of Australia

Demand tariffs are common for large and medium-sized businesses across Australia, but only Victorian distributors offer they to residential customers. South Australia also technically has residential demand tariffs, however they are incredibly rare. The doors have been opened for Queensland and NSW distributors to follow in introducing demand tariffs. However, smart meter uptake in these states remains comparatively low, so it could be some time before demand tariffs become main-stream outside of Victoria.

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 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.

Demand tariffs can save you money if you don’t use much electricity between the hours of 3pm and 9pm on weekday when the demand charge is measured. 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.

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