Understanding Demand Charge
What is Demand Charge
Electrical infrastructure needs to be built and maintained to cope with Peak Demand, and not just cope with steady average demand. Peak Demand is the period when the most amount of power is being drawn from the grid.
For decades in Australia; the growth of overall electricity demand has matched consistently with the growth in peak demand.
However, in recent years, overall demand has declined steadily, while peak demand has continued to grow. Since around 2010 this has emerged as a big problem for the distributors who own the wires and poles as they work to build reliability into the system of aging infrastructure. This trend means that traditional electricity tariffs no longer fairly reflect the costs of building and maintaining the network because the cost of peak demand isn’t fairly being shared by consumers contributing to peak demand.
The idea behind the change is that energy users who cause a large strain on the infrastructure by intermittently using a large amount of power at one time should share the cost of maintaining the wires and poles more proportionally. By introducing a price signal that reflects the cost of building electrical infrastructure to meet peak demand, it will incentivise the reduction of peaks. This will in turn reduce the cost of building new infrastructure. Any avoided cost will ultimately save customers money.
Here is a basic example:
Neighbour 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.
Neighbour 2. Has lots of heaters. 24 of them to be precise. They switch them all on at the same time, and leave them turned on for one hour a day.
On a traditional tariff structure, both customers would pay the same, since they both used the same amount of overall power, even though one neighbour put more strain on the grid. To minimise your demand charge; where possible spread your power use evenly across the day; and avoid using lots of power at once. View this youtube video for more info
How is it calculated and charged ?
Generally speaking (depending on the distribution zone and meter) the demand charge applies between 3pm and 9pm window. The demand charge is an additional charge on top of the usual usage charge for electricity consumption. Let’s say for this example the rate for the demand component is $4/kW/Month. The demand tariff works like this:
It basically monitors your usage and looks for your highest energy usage over a 30-minute interval in kilowatt-hours (kWh) during the demand charge period in any given month. This is then is converted into a demand value (in kilowatts or kW). Let’s say you use a fair few appliances around 7pm (inside the demand time window) and in that one half hour you use a max of 3kWh, and let’s say this is your highest spike in use all month. This 3kW value is then multiplied by the monthly demand charge rate.
In this example that would be 3kW multiplied by the demand charge of $4/kW/month. You would have an additional $12 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 $40. The idea is you pay for putting strain on the grid during peak times.