Demand tariffs introduce a new element to electricity bills. This article will help you understand how Demand tariffs work, and how Bill Hero can help you get the best price outcomes results when your distributor migrates you to to a Demand tariff.

The energy transmission and distribution networks are under-utilised nearly all the time, but they must be built and maintained to accommodate high peak load events — such as those heatwave days in summer when everyone turns on their air conditioners at once — otherwise, the grid will become unstable, requiring 'load shedding', or even blackouts during those high demand times.

Building and maintaining the infrastructure to support these peak demand events 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 helps minimise those peaks.

In Australia, over the past decade, we've seen a steady reduction in overall demand network-wide. However, 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.

Demand tariffs are designed to deliver a 'price signal' to encourage individual consumers to minimise both their total usage during peak times, and also the intensity of that usage

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 a 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, like any other tariff, and an additional fee called a ‘demand’ or ‘capacity’ charge. The demand charge is a charge per kW that may be applied based on your maximum usage during any 'peak' times throughout a billing period.

The structure of the demand change differs across the electricity distribution zones. Demand charges 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 kW can be 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 for a single moment once in a billing period to pay demand charges over the 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.

The main direct benefit of demand tariffs to individual consumers is that the kWh usage rates under demand tariffs should be lower than those on a single-rate tariff, and should also be lower than a non-demand time-of-use tariff.

If you're careful about managing the intensity of your peak demand, and therefore minimising your Demand charges, you could pay less overall under this kind of tariff.

Demand tariffs can punish households that take their eye off the ball and let their electricity usage spike, even for a single moment during the 'demand window'. It's possible that a single moment of high peak consumption can result in a higher price for the entire billing period.

There is risk in being on a demand tariff, and they are suitable only for households with a good understanding of demand patterns, and a solid ability to manage that demand.

It's possible that a demand tariff may save you money, but accessing savings under this kind of tariff will require you to be vigilant in keeping an eye on your power usage to avoid spikes, and adopting efficient energy usage practices.

Typically this means minimising your total 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 dishwashers and washing machines at night, and by daisy-chaining your peak usage so that you avoid running multiple appliances at the same time.

In Australia, electricity distributors are now progressively moving customers onto demand tariffs. The rollout approach varies by distribution zone, as does the detailed structure of the demand tariff. Demand charges may be applied:

Bill Hero will detect from your bill if you are already on a demand tariff, and will compare your bill with the alternative Demand plans available from all retailers in the market.

You'll see the Demand price item broken out in the price breakdown for every plan compared for you.

Unlike Energy Made Easy and Victoria Energy Compare, Bill Hero is smart enough to calculate this additional Demand price into your comparisons.

Demand tariffs are inherently complicated, and not every retailer has billing systems capable of calculating and charging for Demand.

To be on a Demand Tariff actually means that your distributor is charging a Demand component in addition to the network connection and per kWh fees.

Retailers must pay this fee to the distributor for any of their customers on a Demand Tariff, but it's up to the retailer to decide how they manage things to cover this additional element in their cost of goods sold.

Most retailers have designed Demand plans that explicitly include a Demand component, but that's not the only way to do it. Some retailers offer plans to consumers on Demand Tariffs, but do not explicitly charge for Demand in their bills. In this situation, the retailer will have bumped up their consumption charges to compensate for the additional Demand charge, and is effectively absorbing some risk that your wholesale Demand charges will not exceed the margin they've allocated to cover it.