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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:
Imagine two next door neighbours.
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