What is a demand tariff?

Electricity billing is changing and not necessarily in favour of customers. 'Demand tariffs' or 'demand charges' have become available to many Australian households and small businesses and while energy providers tout the benefits of these tariffs, the actual advantage for consumers isn’t yet clear.

Traditionally used for large businesses, demand tariffs were made available to residential and small business customers in 2017. Some providers are not just offering them but actively encouraging customers to switch.

Demand tariffs represent a significant departure from the usual way of paying for electricity. Those with a good understanding of their electricity usage patterns may benefit from a demand tariff. However, for those less familiar, it could lead to higher costs.

What is a ‘demand tariff’?

A demand tariff is a pricing plan aimed at reducing electricity usage during peak times. It adds a fee based on your highest energy use between 3 pm and 9 pm on weekdays.

This fee varies by distributor and can apply daily for a month if the peak is hit once. Rates range from 25c to 45c per kW/day in summer and 8c to 25c per kW/day in winter.

Most residential customers have their demand tariffs recalculated monthly, meaning your highest usage in one billing cycle won't affect the next.

However, in some areas, resets may occur at the start of each season or at the end of the year.

How do demand tariffs work?

In Australia, an electricity demand tariff works by charging customers based on their peak electricity usage during specified periods, typically during weekdays when demand is highest. Here's how it generally works:

  • Measurement: The peak usage is measured over a 30-minute interval, often between 3 pm and 9 pm on weekdays.
  • Calculation: The highest usage during this interval is identified and used to calculate the demand charge.
  • Charge: Customers are then charged a 'demand' or 'capacity' charge based on this peak usage. This charge is in addition to the usual supply and usage charges.
  • Reset: The peak usage is reset monthly for most residential customers. However, some areas may reset seasonally or annually.
  • Cost: The cost of the demand charge varies depending on the electricity distributor and the time of year, with higher rates typically during peak seasons.
  • Incentive: The goal of demand tariffs is to encourage customers to reduce their electricity usage during peak times, helping to manage strain on the electricity grid.

It's important for customers to understand their electricity usage patterns to avoid high demand charges.

What are the advantages of demand tariffs?

The advantages of an electricity demand tariff are many and they include:

Incentivising energy efficiency

By charging higher rates during peak demand periods, demand tariffs encourage consumers to reduce electricity usage when it's most expensive and the grid is under strain.

Saving money

For customers who can shift their electricity usage to off-peak times, a demand tariff can lead to cost savings compared to traditional flat-rate plans.

Stabilising the grid

By reducing peak demand, demand tariffs can help stabilise the electricity grid, reducing the risk of blackouts or the need for expensive infrastructure upgrades.

It’s good for the environment

By reducing overall electricity consumption, demand tariffs can help reduce greenhouse gas emissions and environmental impact associated with electricity generation.

They’re fair

Demand tariffs can be seen as fairer, as customers pay based on their actual peak usage rather than a flat rate that may not reflect their impact on the grid.

They’re flexible

Some demand tariffs offer flexibility in how customers manage their electricity usage, allowing them to take advantage of lower rates during off-peak times.

What are the disadvantages of demand tariffs?

Despite the amazing advantages we listed, there are still disadvantages of an electricity demand tariff to be aware of. These include:

They can be complex

Demand tariffs can be more complex to understand than traditional flat-rate plans, making it challenging for some customers to optimise their usage and avoid high charges.

Higher costs if you don't use off-peak

Customers who are unable to shift their electricity usage to off-peak times may end up paying more on a demand tariff compared to a flat-rate plan.

Unexpected costs

Fluctuations in electricity usage, especially during peak times, can lead to unexpected high charges, particularly for customers who are not actively monitoring their usage.

It can be expensive

Installing and maintaining the meters required for demand tariffs can be expensive, and these costs may be passed on to the consumer.

Manipulation risks

In some cases, customers may try to manipulate their usage patterns to avoid high charges, which can lead to inefficiencies in the grid.

Not available everywhere

Demand tariffs may not be available in all areas or from all energy providers, limiting consumer choice.

Can an electricity demand tariff help you save money?

While these tariffs are promoted as cost-effective, the reality is that significant savings require meticulous monitoring of power usage to avoid peak demand charges.

Numerous electricity usage monitors and apps offer real-time usage data to assist consumers in tracking their electricity usage. Some apps can even send alerts when usage exceeds certain thresholds.

However, few people are sufficiently engaged with electricity to monitor their usage so closely. Even for those who are, it's challenging to determine if the potential savings justify the additional effort.

There are ways, however, to reduce demand tariff charges and it starts with energy optimisation:

  • Use low-cost periods of the day for energy-intensive tasks like using clothes dryers or pool pumps.
  • Avoid using multiple energy-intensive appliances simultaneously during peak demand periods. For example, run your dishwasher first and then your washing machine afterward, rather than running both at once.
  • If you must use several appliances during peak hours, stagger their use in 30-minute intervals to prevent a sudden spike in energy consumption.

Is an electricity demand tariff right for you?

While it can lead to savings if you use less electricity during peak times, there's a significant risk of unexpected charges from incidental extra energy usage. This risk may outweigh any potential benefits, especially in warmer regions where cooling is essential.

If you're diligent about monitoring your usage and can take advantage of peak and off-peak times, a demand tariff might be suitable. However, households like these might still be better off with a time-of-use tariff, which avoids the risks associated with demand charges.

Connect with Compare Energy

Regardless of your tariff, regularly comparing providers and plans can ensure you're getting the best deal. Contact our Australian-based call centre on 1300 790 106 and we will talk you through comparing providers based on prices, green energy options, and more.