Demand tariffs are a new form of tariff intended to reward energy consumers who avoid contributing to peak network loads, and penalise that do.
Background to Demand Tariffs
The energy transmission and distribution networks are underutilised nearly all the time, but they must be built and maintained to accommodate very high peak load events — such as those heatwave days in summer when lots of air conditioners generate lots of demand all at once — otherwise the grid will become unstable, requiring 'load shedding', and consumers would experience blackouts during those high demand times.
Peak load events drive very high spikes in wholesale energy pricing, and they also require extra network transmission and distribution capacity to be available, even though this capacity might be used only once or twice per year.
Building out the infrastructure to support anticipated peak demand is very expensive, and all the costs eventually end up in everyone's bills, so it makes sense to find ways to minimise those peak load events, and also to apportion costs more toward those whose behaviour as energy consumers is driving those peak loads, and reward those whose behaviour avoids those peaks.
In Australia over the past decade years, we've seen steady reduction in overall demand network wide, but peak demand has continued to grow. Shaving peak demand down even a little bit can translate into significant savings at the aggregate level, and demand tariffs are one of the ways this can be achieved.
How Demand Tariffs work
Demand tariffs are intended to deliver a 'price signal' to encourage individual consumers to minimise both their overall usage during peak times, and also the intensity of that usage:
- Overall peak time usage can be minimised by shifting consumption out of peak times and into shoulder and off-peak times as much as possible. This can mean running things like dishwashers and washing machines during the afternoon solar peak, or late at night.
- Not all consumption can be time-shifted. However its usually still possible to minimise the intensity of usage during peak times by daisy-chaining your appliance usage to avoid running multiple appliances at once.
The price signal has two parts: a reward of cheaper rates per kWh, and a punishment of a demand charge that can be incurred if you do create high peak load, even for a single moment in a billing period.
A demand tariff requires a smart meter. The tariff includes electricity usage and supply charges same as any other tariff, and also includes an additional fee called a ‘demand’ or ‘capacity’ charge. The demand charge is a charge per kWh that may be applied based on your maximum usage during any 'peak' times over the course a billing period.
The structure of the demand change differs across the electricity distribution zones. Demand tariffs may be applied only if your usage exceeds a demand threshold at any time in a billing period, or they may always be present, but scale according to your maximum peak demand in a billing period. Demand charges per kWh are applied to every kWh consumed across the entire billing period, or a daily demand charge penalty rate may be applied for every day in the billing period. So you only need to over-consume once to pay penalty fees over an entire billing period.
Demand tariffs are different to how most of us are used to paying for electricity. If you have good knowledge of your electricity consumption patterns, and also have the willingness and ability to monitor and modify your usage, then a demand tariff could save you money. If not, it could cost you a lot more.
Explain it like I'm five...
Household A has a single 1 kilowatt heater running all day. 1 Kilowatt means the heater consumes 1000 watts each hour, and so it will consume a total of 24,000 watts over a twenty four hour period.
Household B has 24 of the same 1 kilowatt heaters, each consuming 1000 Watts per hour. The owner of this household switches them all on at the same time, and runs them for 1 hour. Household B has also used 24,000 watts in the same 24 hour period.
On a single-rate tariff structure, both customers would pay the same amount since they both used the same amount of electricity. This does not acknowledge the additional intensity of demand the household B has placed on the network.
With a demand charge, if the consumption spike occurs during the 'demand window', Household B will pay an additional demand charge for the load their 24 heaters placed on the grid. Household A will pay less, as a reward for spreading out their load.
Demand charge is applied on top of the familiar per-kWh usage charges, and is calculated on your highest level of consumption measured during the 'demand window', which is typically between 3pm and 9pm.
Lets say the rate for the demand component is $4 per kW per Month:
The demand charge is based on your highest level energy usage in kilowatt-hours (kWh), consumed during any 30 minute metering period in the demand window on any day in the month.
This is then is converted into a 'demand value', measured in kilowatts or kW. If you are in Household B, and run all your 24 air conditioners simultaneously at 7pm for 1 hour - which is inside the demand time window - in that one hour period, you use 24kWh, which is is your highest usage spike for the billing period. This 24kW value is then multiplied by the monthly demand charge rate.
That would be 24kW peak demand, multiplied by the demand charge of $4 per kW per month. You would have an additional $96 charge on the bill.
In the next month, if you doubled the number of heaters in your home, and ran them all simultaneously again for an hour, you'd generate a bigger spike of 48 kW, and the additional demand component in your bill would be would be 48 x $4 = $192.
Demand tariff benefits
The main direct benefit to individual consumers of demand tariffs is that the usage rates under demand tariffs should be lower than usage rates on a single rate tariff. If you're careful about managing your peak demand, and therefore minimising the Demand charges, you could pay less overall under this kind of tariff.
Demand tariff disadvantages
Demand tariffs can be punishing for households that take their eye off the ball and let their electricity usage spike for even a single moment, so they'll pay a higher price for the entire billing period.
There is risk in being on a demand tariff, and they are suitable only for households where there is good understanding of demand patterns, and solid ability to manage that demand.
Will a demand tariff save me money?
It's possible that a demand tariff may save you money, but accessing savings under this kind of tariff will require you to vigilant in keeping an eye on your power usage to avoid spikes, and adopting efficient energy usage practices.
Typically this means minimising your overall usage of appliances during peak times, and also minimising the intensity of your usage in peak times. You can achieve this by time-shifting your usage - eg by running dishwasher and washing machines at night, and by daisy-chaining your peak usage so that you avoid running multiple appliances at the same time.
Demand tariff structures
In Australia, the electricity distributors are now progressively moving customers onto demand tariffs. The roll out approach varies by distribution zone, as does the detailed structure of the demand tariff. Demand charges may be applied:
- based on your highest demand in a period of time
- based on your average of peak demand over a period of time
- based on different demand rates in different seasons.
NSW - Ausgrid
Since 1 July 2019, demand tariffs have been assigned by default for all new residential and small business connections and for existing customers on flat tariffs who have chosen to upgrade to a smart meter. Demand (introductory) tariff for 12 months are applied for existing residential and small business customers on a flat tariffs who require meter replacement due to due to meter failure.
Demand (introductory) tariffs are intended to allow customers to understand their patterns of usage for 12 months, before they will be automatically assigned to the default demand tariff. Customers assigned to the demand (introductory) tariff have the option to be reassigned to another demand tariff, or to a TOU tariff.
A new TOU-demand and existing TOU tariffs are available for customers who opt-out of a demand tariff. TOU customers replacing meter for any reason will remain on TOU tariffs, and can opt-in to demand tariffs.
Flat tariffs are no longer available to new connections.
Demand Structure and Charge Window
Each demand tariff for Ausgrid consists of three elements:
- A fixed daily charge (in cents per day),
- An energy consumption charge (in cents per kWh) with a seasonal TOU structure,
- A seasonal demand charge (in cents per kW per day).
The demand element is based on the maximum energy consumption recorded in any 30-minute period within the defined seasonal demand window on a working weekday in each billing period (measured in kW). The resulting demand charge applies for each day in the billing period (before being reset for the next month).
The demand window for measuring the maximum demand is aligned with a corresponding TOU peak energy window. In seasons where there is no peak energy on working weekdays, a summer window of 2-8 pm applies.
More information is available from Ausgrid here https://www.ausgrid.com.au/-/media/Documents/energy-use/tariffs/Demand-tariff-Q--A-for-residential-customers.pdf and here: https://www.ausgrid.com.au/-/media/Documents/energy-use/tariffs/Ausgrid-Fact-Sheet_Intro-to-Residential-Demand-Tariffs.pdf
NSW - Endeavour
Endeavour Energy is introducing both a transitional demand tariff and a ‘cost reflective’ demand tariff intended to provide flexibility for customers to select the pace of their transition.
The transitional demand tariff will become the default tariff for all new customers and those existing customers with the required metering who upgrade their network connection to three-phase or fro bi-directional flow of electricity after installing solar. Customers assigned to the transitional demand tariff will have the option to opt-out to the flat energy based tariff or the seasonal time of use tariff.
The cost reflective demand tariff will be available to all customers on an opt-in basis subject to metering requirements.
Endeavour’s demand tariffs consist of three tariff parameters: a seasonal maximum monthly demand charge, a flat energy charge and a fixed charge.
NSW - Essential Energy
Essential Energy’s demand tariffs are available on an opt-in basis for customers who have an interval or smart meter.
Each Essential Energy network tariff is made up of one or more of the following components:
- A fixed charge component – an annual supply charge that applies to each connected premises to which electricity is delivered. The amount does not vary with the amount of energy a customer uses. This component is charged as a fixed amount per day.
- An energy charge component – a charge that is applied to each unit of electricity consumed in cents per kilowatt hour (kWh). Depending on the particular tariff, the consumption charge may also vary with the time of day or the amount of energy consumed in a period.
- A demand charge component – a charge that is applied to either a customer’s maximum demand level in dollars per kilovolt-ampere (kVA) or per kilowatt (kW) or their electricity capacity requirement in dollars per kVA – depending on the tariff.
Additional information on Essential Energy demand tariffs is available here : https://www.essentialenergy.com.au/-/media/Project/EssentialEnergy/Website/Files/Our-Network/DemandTarrifBrochure.pdf?la=en&hash=07626F1F0BAF28F9924329C1304B0383CD2E673B
Victoria
Demand tariffs are available on an opt-in and opt-out basis for residential customers with consumption less than 60 mWh per annum, or peak demand less than 120 kW.
Demand is based on the maximum demand (kW) in each month that is recorded between 3pm and 9pm on work days with no minimum chargeable demand level (except in the United Energy zone where a minimum monthly chargeable demand of 1.5kW applies).
South Australia
Residential customers can move to a demand tariff on an opt-in basis provided they have the appropriate metering technology.
Demand charges for residential customers are based on the maximum demand in any half-hour trading interval since the last meter read:
- Summer Peak Demand on all days between 1600 and 2100 local time during November to March only
- Winter Shoulder Demand on all days between 1600 and 2100 local time
- Off-peak Demand at all other times (the price is zero for actual off-peak demand)
Queensland - Energex
If a retailer does not specify its preferred network tariff for a new customer, Energex will assign the customer to the Residential Transitional Demand tariff.
If a customer classification is not received from the retailer for move-in small customers, the retail customer moving-in to the existing premises will inherit the existing customer classification and existing network tariff. Move-in customers are not considered as a new customer to Energex, as these customers are not a new connection to the distribution network.
Energex will initiate network tariff reassignment of customers in the following instances:
- When a SAC customer changes from a basic accumulation meter to a smart (Type 4) meter,including end-of-life meter replacement, and customer initiated meter replacement.
- To transition customers that already have a smart meter from a flat tariff to a demand or time-of-use based tariff, and
- as a result of review and assessment of customer assignment to ensure customers are assigned to the correct tariff class and tariff
Demand charges for residential customers are calculated as a $/kVA/month or $/kW/month, for demand recorded at a connection point. These charges are applied to the maximum half hourly kW power reading that occurred at a connection point during either:
- a single peak recorded anytime in the month, or
- the maximum demand recorded within a peak demand window (specific timeframe).
- Peak demand on all days between 1600 and 2100 local time
How does Bill Hero handle demand tariffs?
The data present in your bill is specific to the tariff type you are on. Bill Hero does not compare between tariffs, and so will not recommend a demand tariff option for subscribers who are not already on a demand tariff.
If you are already on a demand tariff Bill Hero will compare the final price in your demand tariff bill with what you would have been charged under a non-demand time-of-use tariff.
If your demand tariff bill does not display a demand charge line item at all, or if that item is $0, this indicates that you did not cross your demand threshold for that billing period, and no demand charge was applied to this bill.
If your bill includes a demand or capacity charge line item, then Bill Hero will add the $ value for that demand charge component to the peak rate charge. This accurately reflects the effective price you were charged for your peak consumption under that demand tariff.
In both cases, Bill Hero will then compare your bill against all the competing time of use plans, and the results will show you what you would have paid for that same usage under all the regular ToU tariff plans, and illustrate how your demand tariff bill ranks against those alternatives.
In theory, if you are on a demand tariff, your time of use rates and your final bill price should be lower than the price you'd pay under competing ToU plans for the same kWh usage.
If your demand tariff bill comes in at a higher price than an alternative time of use plan, then this is an indication that your demand tariff plan may not a good deal, since not only are you paying more than you need to, you're also accepting the risk of price increase should you ever cross your demand threshold, and you should consider changing to a regular ToU tariff.