What is a Demand Charge?

Demand charges are imposed by the network distributors on certain tariffs, and are an example of cost reflective pricing. They provide an incentive to consumers to shift their energy usage outside of demand periods.

The electricity grid can face periods of high demand, where many consumers are using a lot of power simultaneously. If distributors don't plan for this peak, the grid can become unstable and blackouts may result from these high demand events.  Building infrastructure to support this sort of peak demand is very expensive.

The idea behind the "cost reflective" pricing structure of demand charges is that energy users who place high demands on the grid by intermittently using a lot of electricity at one time should share the cost of maintaining the grid more proportionally. By introducing a price signal (ie. you pay more when your usage spikes) that reflects the cost of building and maintaining electrical infrastructure to meet peak demand, it will incentivise the reduction of peaks. Customers who place less of a strain on the grid, will pay less for their electricity.

Here is a basic example:

Household 1. Has a single 1 kilowatt heater which is switched on all day. It will use 1000 Watts each hour. It will therefore use 24,000 watts steadily over a twenty four hour period.

Household 2. Has lots of heaters. 24 of them to be precise that use 1000 Watts per hour each. They switch them all on at the same time during the demand window, and leave them turned on for one hour a day.  They have also used 24,000 watts in the same 24 hour period.

On a traditional tariff structure, both customers would pay the same amount since they both used the same amount of electricity.  With a demand charge, Household 2 is paying for the load their 24 heaters put onto the grid during the 1 hour interval they were all running.  Household 1 is saving money on their electricity bill by spreading the load out during the day.

How is it calculated?

The demand charge applies during the Peak window (timing dependent on the distribution zone and meter). The demand charge is an additional charge on top of the usual electricity consumption charge, and it is calculated by multiplying the demand power value by the demand rate and the number of billing days for the calendar month (demand charges will reset at the end of each calendar month).

Your meter will monitor your usage and look for your highest energy usage during a 30 minute interval during the Peak or Demand Charge period in any given billing period.  It will record this in kilowatt-hours (kWh).  This is then converted to the demand value in kilowatts or kW.

For this example, the rate for the demand component is $0.25/kW/day. The demand tariff works like this:

During your demand window, you decide to run all your appliances simultaneously.  All these appliances running at the same time cause a spike in your usage so during one half hour interval, , so you end up using a maximum of 5kW at some point during the demand period.

The demand charge for a 30 day calendar month will be calculated as follows: 5kW x $0.25/kW/day x 30days = $37.50.

You would have an additional $37.50 charge on the bill on top of the daily supply and usage charges. If you had spike in usage of 10kW the next month, then your demand charge component would be $75. 

The following month, you use shift your power usage to off-peak periods where possible and your demand power value is 1kW.  In this bill, the demand charge would be only $7.50.

How is this good for me?

Generally, tariffs with demand charges feature lower general usage rates than those without, and this can  easily work in your favour.  If you are mindful and spread your usage out over time (for example, finishing with the oven and turning it off before you turn on the air conditioner), or use heavy-consumption appliances only during Off Peak times where possible (like running your dryer overnight), you can save money on your electricity bills. 

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