What are demand charges?
Demand charges are a new type of energy pricing that some homes are being moved to. Controversially it ends up with many homeowners paying significantly higher energy bills and not understanding why.
Sam Bendat
Updated: August 21, 2024
New demand charges are being rolled out around the country!
Between the carrot and a stick, I would definitely say demand charges fit into the stick category of motivating tools. So lets breakdown how we're being thumped this time.
Demand charges are basically penalties for using too much energy
Demand charges are a newer invention for our energy bills that are meant to try and move people away from consuming a lot of energy during peak times.
During peak times the grid that powers our homes and businesses is stressed with too much demand from about 4pm to 9pm. To try and incentivise people to shift their energy consumption, the energy distributors created demand charges as an additional fee that will punish high energy users during those peak hours.
Naturally, your energy provider passes those extra demand charges on to you, the consumer, and voilà, we now have demand charges added to your bill.
But its not all doom and gloom, maybe some of us can make this work to our benefit?
Its difficult to make demand charges work to your benefit
Simply put, it is pretty difficult to take advantage of demand charges. You have to be a pretty diligent energy consumer.
The incentive for you is that the energy provider will sell you a cheaper base rate for your energy given you agree to also having demand charges included. It is then up you to try and use as little energy as possible during the peak demand period each night so you don't get hit with high charges.
But the peak times are also generally when people use the most energy, from 4pm to 9pm, so godspeed on making it work in your favour. If you want to give it a shot I would highly recommend tracking your energy usage through an app to learn more about your consumption patterns.
A demand charge example
Say that at around 6:30pm you turn on a few devices and cook dinner. Your energy consumption spikes and you reach 4kW of energy usage. Unfortunately, you must multiply that energy usage spike by your demand charge price. If your demand charge price is 34¢ per kilowatt you will be charged $1.36 on top of your normal, albeit discounted, energy costs.
The real kicker though is once you reach that peak charge at any single moment in a month, it is locked in for the rest of the month as your baseline demand charge rate until it resets the following month.
If that sounds confusing and a little scary that's because it is!
So, in that example from before, if the home hit $1.36 on some random weeknight, that price is now the set baseline charge for every day of the month. In effect, you must pay $1.36 multiplied by the number of days in the month. This is regardless if you use less energy every other night in the month. Sorry, it's locked in!
And if the home were unfortunate enough to use even more energy some other night in the month then the demand charge would increase to that new baseline until the next month.
The energy providers are salivating and emissions take a back seat
You are probably not spiking your energy usage every night to the exact same level, so in the end, your energy provider will make more money off of you than they did before. The energy provider comes out as the real winner here and to no surprise they are very keen to get homes on to demand charge plans at the moment.
Another less discussed aspect of the demand program is its effect on lowering greenhouse gas emissions.
It is reasonable to conclude that if a house uses less energy during peak hours, it may overall use less energy in a day and a added benefit of that is the house will emit less carbon into the atmosphere.
But it's also possible that if too many people shift their usage to much later in the evening, instead of the late mornings or afternoons, they rely more on fossil fuel energy than they would have. During the night, fossil fuels can power as much as 80% of the grid as there is no solar and only a bit of wind and hydropower available as renewable sources.
Although a huge increase in late-night emissions is a bit of a stretch at the moment, it is something we should be mindful of. If in the future, we all start charging our electric vehicles at 3am using 80% coal and gas power we're going backwards not forwards.
In one shock piece by the ABC a small business in QLD has decided to install a gas oven instead of an electric one because he's locked into a plan with demand charges and its cheaper to just pay for gas instead. Not ideal...
Figuring out which energy plan is right for your home
Two and a bit years ago, my Mum asked me if I could help her find an energy plan for her home. I was shocked at how hard it was to get a straight answer for such a simple request.
A not fun fact, there are around 13,000 to 15,000 energy plans available in the market on a single day, including these new demand charge plans. But how on earth are we to know if any single plan will save us money or cost us more?
It's the reason I started SolvingZero. To try and help homes make smart decisions based on their personal circumstances.
SolvingZero is now able to download your energy consumption data and help you make smarter decisions, so you no longer have to guess what the best plan is. The answers are based on your actual consumption patterns and are personalised to you.
If you want to try the app let me know, we are currently testing it out with a few homes around the country.