The application of electricity demand tariffs in New South Wales is adding hundreds of dollars to household bills, in some cases without the consent of the consumer and often without any information on how these complex and potentially costly price signals work.
In its latest annual report on the performance and competitiveness of the NSW retail energy markets, the NSW Independent Pricing and Regulatory Tribunal (IPART) has found that demand charges can add up to $800 to an annual electricity bill, depending on the plan.
Demand tariffs are intended to account for the strain a customer places on the electricity network during periods of high usage – and incentivise them to avoid using energy-hungry appliances during times of peak demand.
Described to Renew Economy by one independent retailer as “a nightmare to design a product around,” they work by applying a daily charge that is usually based on a customer’s highest half hour of usage in a month during peak times.
This means that if a customer happens to unwittingly use, say, their oven, washing machine, and air conditioner all at once in an evening peak they will incur a very high demand charge not just on that day, but for every day that month.
In NSW, the three distribution network companies – Ausgrid, Essential Energy and Endeavour Energy – charge network tariffs to retailers which may include a demand charge, in addition to a supply charge and usage charges.
Only customers with smart meters can be assigned to demand tariffs and, as smart meters are rolled out across the state, IPART notes that an increasing number of customers are being assigned to them.
The regulator says the number of residential customers on network demand tariffs increased from 190,000 to around 430,000 between 2021-22 and 2023-24, increasing the total share in the state from 6% to 13% of all residential customers.
As the IPART report notes, a retailer has a couple of options for how they deal with demand charges, including choosing not to pass them on to customers, and instead recovering this cost from supply and usage charges, or passing them through as a separate charge component.
Either way, it’s complicated, and makes it very difficult for retailers to design a plan around a a charge that might happen at a single point on one day of the month, but set the price for the entire month.
Adding to the confusion, IPART’s analysis of demand tariff plans available to customers in the Ausgrid network, alone, found a wide variety of charge rates which, for residential customers, ranged from 1 c/kW to around 40 c/kW.
It says that, typically, introductory demand charges start at around 1-2 c/kW for both residential and small business customers, in a bid to provide customers with an understanding of how they work and give them a change adjust their usage patterns before being stung with huge bills.
But IPART found some plans in the Essential Energy and Endeavour Energy networks to claimed to be introductory without the introductory pricing.
“For instance, we found several instances of ‘introductory’ demand charges exceeding 10 c/kW and up to 37 c/kW. This suggests that plans marketed as introductory may still carry high demand charges,” the report says.
In other cases, IPART found cases where residential customers who signed up to an introductory plan with a low demand charge suffered bill shock when the plan switched to a higher charge after the 12-month initiation period.
In this case, the report says, the customer could suddenly face a substantially higher bill, with a demand charge component 20 times higher if they were unaware of the change or unable to calculate or understand the impact of the change in pricing.
The lack of consumer understanding of how demand tariffs work – or in some cases, not even knowing when they have been applied – is a big problem and the consequences for customers can be costly and painful, further eroding trust in the market and, in particular, in retailers.
“Households are the secret weapon for the energy transition – it’s essential that we engage them now,” Flow Power founder and CEO Matthew van der Linden told Renew Economy.
“It’s critical that we don’t create a barrier to entry by making the market too technical and setting too high a bar for knowledge.
“Explaining that prices can be expensive and cheap is doable. But explaining that there’s this other thing called demand and that it’s not the same as energy – that’s really hard!,” van der Linden says.
“Telling customers that they must avoid mistakes at all costs because one error could lock them into higher costs for the whole month is discouraging. Once that mistake happens, there’s often nothing they can do to rectify it – it’s already baked into their charges.
“My view is it’s a mistake to try to add that to the mix of the market. There are better, more pos
What is never going to be palatable to customers is a sudden hike in what you pay for electricity, with little or no explanation.”
IPART’s analysis of the annual cost of demand tariff plans for non-solar customers in the Ausgrid distribution network found the annual demand charge component can range from as little as $10 to over $800 for the same customer, depending on their plan.
Across the board, it found that non-solar customers on demand tariff plans were likely to have annual bills that were, on average, $200 to $300 higher compared to if they were on a flat-rate or time-of-use tariff plan.
IPART also found a distinct lack of consumer protections in place to avoid them being stung by demand tariffs, starting with the fact that the Default Market Offer (DMO) price cap does not apply as a safeguard for demand tariff plans.
A submission to the regulator from National Seniors Australia also points out that there are limited tools to assist customers in making decisions on demand tariffs, including that Energy Made Easy does not have the functionality to estimate a bill for a demand charge.
In particular, the submission notes that by excluding demand charge costs from estimates of the total cost of the plan, consumers are more likely to choose demand tariffs that may not be appropriate for them and could cost more than alternative plans.
Other stakeholder submissions raised concerns that households and small businesses are being moved onto demand tariff plans by their retailers without their consent – and that customers do not understand or cannot respond to the complex price signals in these tariffs.
Ultimately, IPART concludes that, given their complexity, more analysis is required to demonstrate the benefits of demand tariffs for different types of customers.
“In our view, further work is also required to determine whether demand tariffs are likely to provide a stronger incentive to residential customers to shift demand compared to more simple time-of-use tariffs,” the report says.
“For demand tariffs, to reduce the demand component of their bill, a customer would need to reduce their maximum demand on every day of a month. This may not be achievable for many residential customers.
“Unlike a time-of-use tariff, once a customer has had a ‘high-demand’ day, the demand tariff design does not reward them for shifting behaviour on other days (including the network peak days).”
IPART tribunal member Jonathan Coppel says competitive retail energy markets are meant to ensure prices are reasonable, consumers receive high quality service and products meet changing needs and preferences.
“In 2023-24, more consumers in NSW switched energy retailer or plan, and new and innovative energy products and services continued to emerge,” Coppel on Thursday.
“However, customers faced higher electricity prices, with prices increasing by around 35% in the year to August 2023, driven by higher wholesale energy and network costs.”
Coppel says that for customers on a demand tariff plan, most retailers will allow them to switch onto a time-of-use tariff plan instead.
“The Australian government’s Energy Made Easy website is able to provide a bill estimate for time-of-use tariff plans based on your usage,” he says,
IPART has made 10 recommendations to improve competition and consumer outcomes in the NSW retail energy markets. These recommendations are targeted at:
- giving consumers better information on the price of energy plans to help them find cheaper offers
- removing barriers that consumers face when they go to switch
- making sure there are adequate protections in place for customers that do not engage
- highlighting areas of the energy supply chain for further investigation.
Sophie is editor of One Step Off The Grid and deputy editor of its sister site, Renew Economy. Sophie has been writing about clean energy for more than a decade.
