How residential demand tariffs could add $1000s to your bill

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As residential demand tariffs are rolled out around Australia, we take a look at what they are, how they works, and why many households should avoid them at all costs.

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One Step Off The Grid

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Electricity companies around Australia are starting to roll out a new way to charge you for electricity. It is called a residential demand tariff.

Unsurprisingly this new tariff can result in higher bills for you, and higher profits for them.

This post is important. It will explain to you what a demand tariff is, how it works, and why many households should avoid it at all costs.

The electricity companies want to make demand tariffs the norm, so you must be armed with the knowledge to spot one when you see one, and understand the implications of signing up for one.

Why have the electricity companies invented a new residential tariff?

At the start of this century electricity bigwigs expected grid demand  to continue to grow, just as it had for decades.  Instead, electricity consumption peaked and then declined.  This came as a shock to the electricity sector which had spent billions of dollars expanding transmission and distribution infrastructure that was now not needed.

Because the regulators allowed them to pass on the costs of their bad investments to consumers, electricity prices soared and many Australians turned to solar to ease the pain of their skyrocketing electricity bills.

Rather than admit their mistakes and attempt to adapt to the new situation electricity  generators, distributors, and retailers have instead relentlessly lobbied to make it difficult for you to install solar.

Successfully campaigns include:

  • abolishing Australia’s carbon price
  • weakening the Renewable Energy Target
  • increasing restrictions on solar power

They have also continuously attempted to impose fees and charges on solar homes which, thankfully regulators rejected.

So the energy cartel found another way to discourage rooftop solar. It’s called a residential demand tariff.

On August 1 2016 they became available in South Australia: Click Here for Energy Price Fact Sheet

and Victoria: Click here for Energy Price Fact Sheet

And they may well be available now in other states, lurking inside electricity retailers’ roster of deals, hidden from hapless Googlers like you and me. So watch out for them.

While large consumers of grid electricity could potentially use demand tariffs to lower their bills, the average Aussie home will be hit with demand charges that will get very expensive very quickly.

As an example of how ridiculous things can get, with the new South Australian demand tariff, some types of electric instant hot water heaters can result in a single, long, hot shower adding over $1,200 to a quarterly bill.

Seriously.

What is a demand tariff?

Demand tariffs don’t just charge you for the electricity you use, measured in kilowatt-hours, they also hit you with a capacity charge based on the peak power drawn from the grid, measured in kilowatts. While many businesses have had these demand tariffs for some time, they have only just become available for households.

The Victorian residential demand tariffs hit you with a daily demand charge, or capacity charge, based on the maximum amount of power used 3pm-9pm any day of the week. The peak is reset monthly. So if you hit the peak just once, you pay the daily capacity charge for every day for the whole month.

The South Australian demand tariffs hit you with a demand charge based on the maximum amount of power used  3pm-8pm Monday to Friday excluding public holidays. It is reset every billing cycle. So you only need to reach a peak once, and you’ll pay that daily capacity charge every day for 90 days. Ouch.

The daily capacity charge can range from 14 to 47 cents per kilowatt of peak household demand, depending on location and time of year. Generally summer demand charges are higher than the rest of the year. Presumably to catch out air conditioners.

In Victoria people can still get time-of-use tariffs without demand charges, but in South Australia anyone signing up for a new time-of-use tariff appears to be put on to a demand tariff.

Very soon I will write an article that goes into the specifics of Victoria’s residential demand tariff. But in this article I am going to describe just what a demand tariff is in general, why they exist, and how well, or rather how badly, they do their job.

Of kilowatts and kilowatt-hours

If I turn on a 1 kilowatt bar heater it will use 1 kilowatt of power for as long as it is on.

There is an excellent chance you don’t find that terribly surprising.

If I leave it on for 1 hour it will use 1 kilowatt-hour of electricity.  If I leave it on for 24 hours it will use 24 kilowatt-hours of electricity and in that time it will never draw more than 1 kilowatt.  If you paid a capacity charge for that electricity use it would only be for 1 kilowatt.

If instead of leaving a 1 kilowatt bar heater on for 24 hours I turned on 24 bar heaters for one hour, the total amount of electrical energy consumed would be the same at 24 kilowatt-hours, but the maximum amount of power drawn from the grid at one time would be much higher at 24 kilowatts.

In summer in Victoria a daily capacity charge for a one-time use of 24 kilowatts from 3-9pm would come to $7.60 per day, every day for that month.  In South Australia it would be $11.29 per day, every day for the quarter.

The $1,227 thirty minute shower

While they are not common, some electric instant hot water heaters can draw over 29 kilowatts.  As a result it would be possible for a single, long, hot shower in South Australia to result in a monthly capacity charge of $1,227.   But since you are much more likely to take a long hot shower in winter when capacity charges are lower, it might only cost you around $5101

So as you can see, with demand tariffs, capacity charges can get very large, very fast, if you draw a lot of grid power at the ‘wrong’ time.

Demand tariffs can help the grid

Demand tariffs can cut electricity use during peak periods and so cut the maximum amount of power the grid has to supply.  This enables the network companies to spend less on transmission and generation infrastructure, potentially lowering the cost of grid electricity for everyone, including those without demand tariffs.

However, while demand tariffs are better than standard flat tariffs at reducing the grid’s maximum demand, it is not clear if they are more effective than a time-of-use tariff without demand charges. Demand tariffs are not very efficient at their job because household peak demand often does not coincide with grid peak demand.

Don’t panic!  Demand tariffs demand smart meters

While many households, particularly ones that are modest users of grid electricity such as most with rooftop solar, will be worse off with a demand tariff, don’t panic. You got that? DON’T PANIC!!! If you feel the urge to panic creeping up on you, just do what I do and run around waving your arms above your head while screaming wildly until the feeling subsides.

Unless you use hundreds of kilowatt-hours of grid electricity a day, you cannot be forced onto a demand tariff. Not at the moment anyway.  Most Australian households don’t even have the necessary type of electricity meter. You need a smart meter and at the moment they are not very common outside of Victoria.

Maybe panic just a little if you are on an SA time-of-use tariff

Time-of-use tariffs without demand charges are no longer available in South Australia. If you are a South Australian with a smart meter and on a time-of-use tariff it is extremely unlikely that you were switched over to a demand tariff without notification. They are not allowed to do that.  If you are feeling paranoid feel free to check just to be sure, because if you were switched to a demand tariff your soaring electricity bill could punch a hole in your ceiling. And potentially go on to poke a hole in the moon.

How a smart meter calculates peak power

Smart meters aren’t actually smart enough to measure a household’s peak power use. In fact, I’m not even sure why they’re called smart meters.  Even I can out think them four times out of five. What smart meters do instead is record your kilowatt-hour use in half-hour increments and use that to determine your demand charge. The number of kilowatt-hours used in a half-hour is doubled and used as the number of kilowatts of power to determine any demand charge that may apply.

If in a half-hour period you draw 20 kilowatts from the grid for 1 minute and 1 kilowatt for the other 29 minutes, then the smart meter calculates that you only drew 1.63 kilowatts in that time. This means if you draw a large amount of power, but only for a very short period, you won’t receive a large capacity charge for it.  If your brief period of high electricity use straddles two half hour periods it is divided between them. This means that careful timing, perhaps using a home energy management system, can help lower capacity charges.

Because a large spike in the amount of grid power used gets smeared out over half an hour by the smart meter, if you have an air conditioner or other appliance that has a largeinrush current in the first fraction of a second when turned on, you won’t have to pay through the nose for that.

A demand tariff’s minimum capacity charges are an insult

Daily demand tariffs have a minimum capacity charge of 1.5 kilowatts. This id demand charges giving the people of Australia the middle finger.

The justification we have been given for introducing demand tariffs is to encourage people to cut their electricity consumption during peak periods to ease strain on the grid.  That is a worthy goal and not at all unreasonable. However, if that is really the goal, then it makes absolutely no sense at all for demand tariffs to have minimum capacity charges.

A household cutting their capacity charge from 1.5 kilowatts to 1 kilowatt provides the grid with exactly the same benefit as a household reducing it from 10 kilowatts to 9.5.  There is no justification for removing the incentive for people to reduce their capacity charges below the minimum.

It is almost as if the designers of the demand tariffs wanted to find a way to collect more from solar owners despite their reduced grid electricity demand.

The more electricity you use the less demand tariffs charge

Another strange thing about demand tariffs that does not help them reduce strain on the grid is the more electricity households use, the less they pay per kilowatt-hour on average.  Homes that use more than 6.58 kilowatt-hours of electricity a day, either through the day in Victoria or from 7am to 11pm in South Australia, pay less for each additional kilowatt-hour of electricity they use.

Decreasing the cost of electricity as you use more of it, reduces the incentive people have to consume less. The charge per kilowatt-hour should either remain constant, which is easy for people to understand, or if they are really serious about reducing strain on the electricity grid, the price should increase as more electricity is used.

The way demand tariffs are designed means people who use little grid electricity, because they are poor, concerned about the environment, or simply efficient, end up paying more per kilowatt-hour than the rich and/or wasteful.

Demand tariffs are not efficient at reducing peak demand

The electricity companies tell us that introducing demand tariffs is to cut peak grid demand to give benefits for all grid electricity users.  So far no one has stated their real purpose:

  • to further confuse consumers over what is the best plan for them
  • to bilk money out of those who choose poorly
  • to cut the uptake of rooftop solar.

The minimum capacity charges make sure that residential demand tariffs meet all 3 goals.

While demand tariffs can reduce peak grid demand they have major problems in achieving this goal as they are not very efficient at their job.

Peak demand periods are rare but demand tariffs penalise you every day

The electricity grid only suffers severe stress a dozen or so days a year for periods that last 1-4 hours.  But demand charges are calculated from grid power used on every single day of the year, either from 4-9pm, Mon-Fri for a South Australian demand tariff or anytime 7 days a week for a Victorian daily demand tariff.  As a result, the time period used to determine a household’s capacity charge is unlikely to coincide with a time the grid is under real stress.

So demand tariffs are not actually focused on getting you to reduce your electricity use when the grid is strained. They are designed to train you to use less electricity in the evenings by punishing you with capacity charges. Personally, I’d much rather put effort into reducing consumption when the grid genuinely is under real strain rather than every evening.

Peak demand varies by location but demand tariffs are state wide

Location is also a problem.  Different parts of the grid can have their peak demand at different times, but demand tariffs do not account for this.  Also, while there are places in Australia where is not enough transmission capacity, there are plenty of places that have far more than they need, but demand tariffs make no distinction between them.

Despite all these problems, demand tariffs can still lower peak grid demand, but crikey, they are a very blunt instrument.

Dynamic tariffs are more precise than demand tariffs

Dynamic tariffs are a more precise form of tariff. They work, like demand tariffs, by charging you less per kilowatt-hour on average than a standard tariff.  But for 1-4 hours on about a dozen days a year, you get charged several dollars per kilowatt-hour used. You get at least 24 hours notice of these ‘peak periods’.  With this tariff it is possible to be almost 100% sure households will either be reducing their electricity consumption or significantly contributing to the high cost of meeting peak grid demand.  Dynamic tariffs are not as clumsy or random as demand tariffs. They are an elegant tariff for a more civilized age.

Personally, dynamic tariffs appeal to me because I could easily plan my day around them and when they occur, perhaps turning the power off at the mains and going shopping. However, while dynamic tariffs have been successfully trialed in Australia, I am not aware of any that are available at the moment.

To sum up: Be very wary of residential demand tariffs

Be very cautious about signing up for a residential demand tariff.  If you are a very large user of grid electricity they can save you money, but you will still want to be sure the demand charges won’t result in you paying more.

Modest users of grid electricity are not likely to benefit.  The typical Australian household with rooftop solar that goes on a residential demand tariff will probably be in for one hell of a shock when they get their electricity bill.

However, if you are a modest user of electricity and you can keep your demand charges to a minimum, possibly through using battery storage, then it could be worthwhile for you.  But for most people, I recommend you avoid demand tariffs like the plague. And I’m not talking about something mild like a plague of boils here. I’m recommending Black Death levels of avoidance.

This article was originally published on RE sister site One Step Off The Grid. To sign up for the weekly newsletter, click here.

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13 Comments
  1. trackdaze 3 years ago

    Thanks,will do

  2. MaxG 3 years ago

    Nicely explained… and it clearly shows that it is not about reduction in consumption, nor energy saving, nor cheaper tariffs BUT milking the customer to the max to maintain the profits like there is no tomorrow… shenanigans!

  3. darkdirk 3 years ago

    I think your calculations are out with regard to the ‘long hot shower’. The 29 kW would be used for only part of the hour, so it won’t count as 29kW according to the way you said they would be calculated by smart meters.
    Also, you should factor in the lower daily charge and volumetric rate that is being brought in with demand tariffs when calculating the price impact.
    Additionally, wouldn’t the smart meter add together two half-hourly intervals rather than take one and double it?

    • Daniel 3 years ago

      With the shower, surely a high power element for rapidly heating a hot water system would still have to take half an hour. It used to take over two hours for my electric booster on my solar hot water system to heat up in winter.

      With the smart meter, a higher demand tariff would be achieved by taking the greatest half-hourly interval and doubling that. One would predict the higher revenue raiser would be the chosen option.

      • darkdirk 3 years ago

        It’s instantaneous though, not storage: so it should be on only while the shower is running. Also, this system is not a typical one. It’s three-phase, for one thing, which is uncommon in homes. The author has chosen the most extreme example to make a point.
        Demand tariffs certainly are capable of having a serious impact on some high demand households (in fact they’re designed to penalise high demand); but are probably beneficial to many other households, and relatively neutral to many more.

        • Daniel 3 years ago

          Oh ok. Do you happen to be installing residential or commercial PV/storage to cut these demand charges? If so getting success with it including decade long payback or so?

          • darkdirk 3 years ago

            I’m not an installer, I work in policy. The demand charge is based on the measurement during the defined peak period only, so any form of storage helps if it can be used instead of grid power during the demand measurement period. In some circumstances this could improve the payback period for batteries

          • Daniel 3 years ago

            Ok likewise, I’m electronics tech (army) retrained as social worker. I think the next primary group to move forward is customer with profile:
            A) can easily self consume during solar day (home office, retired or people who own a small or large work premise,
            B) have enough PV space to at least cover solar day electricity needs and a bit to cut an evening peak,
            C) would consider a small or medium battery, perhaps inverter/charger with behind the meter load management software,
            D) getting stung by their current situation Eg. A commercial, community based or government premise effected by new charge structures or a moderate to high demand residence…

  4. Daniel 3 years ago

    Wow, great article. It’s going to take me some time to work out how to design/programme/modify my solar system to cope with this. I know my inverter/charger is currently programmed to draw a maximum of 32A (7.36kW) and then has to get the rest out of the battery. So I guess that caps my capacity charge at the rate for 7.36kW. Unfortunately I only purchased a small inverter/charger that delivers 2500W so that is only going to modestly reduce my potential capacity charge in any given half hour. If I had purchased a 5000W inverter/charger, that could have used batteries more to iron out the capacity charge over any half hour period by getting peaks from the battery instead. Then I could have reduced the maximum AC input from the grid to less than 32A as there would have been plenty of peak power from the inverter/charger.
    The next issue seems to be this puts pressure on my battery bank to get me to 8pm or 9pm. In summer the batteries could carry me all through the night. In winter I struggle to get to 8pm or 9pm if I’m running the reverse cycle air conditioner. This seems to create a problem because this use is going to set the capacity charge for the bill.
    I’ll have to reread your article again soon before planning the next parts of the solar system. I’m in NSW and I don’t currently have a smart meter although the daily supply charge has increased enormously, which catches me out no matter what I do, except of course aiming to be totally off grid which isn’t currently in my financial means or particularly financially viable for a reasonable payback period.

  5. Daniel 3 years ago

    One thing I’ve noticed is even during sunny winter days, there is still often an excess of electricity from the PV. This would be a common problem because PV is cheap and the general rule is oversize, so there’s still lots of power for cloudy days and winter. Indeed, this is what SA meeds to do, keep installing more renewable energy. However there is still this problem of battery prices and hence being able to deploy cheap solar power in the evening peak and overnight.

    I can’t imagine demand tariffs would be such an issue for air conditioning in summer, as the days are long, and the sun is shining allot of the time the air conditioning will be needed – for those homes which need air conditioning due to little cross ventilation or not built to passive solar principles (like mine). I guess people would need to size their inverter/charger with an adequate nominal power output to drive the kWh of the air conditioner, plus the other small continuous loads like the fridge, computers, router, lights. Since batteries are still expensive, it would only seem necessary to design it big enough to carry the house through the evening capacity tariff, so batteries and inverter eliminate evening power usage between 3pm – 9pm. Unless people use allot of air conditioning, I can’t see that being much of a problem because the sun is shining so late in summer.

    So the problem appears more to be winter. PV harvest is less in winter, though that’s fairly easy to fix by doubling the PV (e.g. compared to that needed in summer). Even though the PV wouldn’t be used much of the year (unless it was fed into the grid), the PV is cheap and therefore easy to obtain given adequate roof area. So the main problem with demand tariffs I can see, is the sun going down early in winter, placing stress on batteries to heat with reverse cycle air conditioning during 3pm – 9pm.

    Perhaps winter heating is less of a problem for people who work or study at home or who are retired, as they would use a larger percentage of the rest of their power during the day. These people can enjoy cheap PV with smaller battery to chop their bill down. Heating in winter would seem an even bigger problem for those of us who come home from work and want to do everything else in the evening peak as well.

    As the three people here work and study at home, we’ve noticed there’s excess power from the PV on sunny winter days, so sometimes we chuck a whole bunch of vegetables etc in the oven and cook it relatively slowly during the solar day. It took us time to get our heads around it and prepare it in the morning, rather than the evening, to make it so. Obviously washing machines would add 2kW to a demand peak, so they should be programmed to be turned on by an inverter/charger during the solar day and more evolved inverter/chargers are gaining more load management software. Ditto the electric booster for the solar hot water is probably the biggest power user in a house in terms of kWh over 30 minutes, so a manual booster should be load shifted to the solar day either with load management software or manually. I imagine we’ll all develop new habits and inverter/chargers with load management software will become more important. I’m aiming more for onsite load management, rather than hoping for a cooperative grid with smart meters and the idea of a smart grid. I have so little faith in grids, I would not wait for smart software on their end. Inverter/chargers are being provided with more AC circuits that can be programmed for load management. I heard from an installer that Selectronic inverter/chargers already have this provision although haven’t checked it out myself as yet. The whole load management concept and programming loads to turn on and off is still fairly new, to me anyway.

  6. Daniel 3 years ago

    If I were RenewEconomy I would ring the managing director of Selectronic, can’t remember his name, though he was very humble and personable on the phone, ring him or someone like him, and get them to do an article on behind the meter load management. Two advantages are it tailors the loads to the solar day, and with the above article in mind – it hence takes loads away from the evening demand tariff capacity charges…

  7. Daniel 3 years ago

    The other side sets forth their battle plan. Do solar households have a way forward? Do medium and large scale business premises have a way forward? Can RE survive and achieve a financially viable system payback?

  8. Johnny Elvis 3 years ago

    Looks like the utility is starting to look like the Internal Revenue Service more and more every day; might as well compare all their billing shenanigans to the U.S. IRS tax code. We need decentralization of POWER on all levels.

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