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

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demand tariffs
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.

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.
Source: Solar Quotes. Reproduced with permission.

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