What is a Demand Charge?

Demand charges are designed to help you benefit from the installation of your smart meter. They provide an opportunity for you to manage your electricity bill by changing how you use electrical appliances during peak times.

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?

Generally speaking (depending on the distribution zone and meter) the demand charge applies during the Peak window. The demand charge is an additional charge on top of the usual electricity consumption rate, and it is calculated by multiplying the demand value by the demand rate and the number of days on the bill.

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. The demand tariff works like this:

Lets say it's dinner time on a cold rainy day (during your demand window).  You've turned on the oven to cook dinner, the heater is running because it's cold outside and you've got the dryer on to dry your work uniform for the next day.  All these appliances running at the same time cause a spike in your usage so during one half hour interval, you use 5kW and that is the highest spike you get over the billing period.

In this example that would be 5kW multiplied by the demand charge of $0.25/kw multiplied by the number of days on the bill.  In this example lets say the bill was over 30 days.

You would have an additional $37.50 charge on the bill on top of the daily supply and usage charges. However if in the next month you had massive spike in usage of say 10kW, then your demand component would be $75.  The following month you use change your habits a bit and use high powered appliances only during off peak where possible and your demand value is 1kw.  In this bill the extra charge would be only $7.50. The idea is you pay for putting strain on the grid during peak times.

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're 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 even use heavy-consumption appliances only during Off Peak times where possible (like running your dryer overnight), you can save money on your electricity bills. You just need to pay attention to when you're using energy, and how much.

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