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Electricity Demand Charges
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by Matthew Ford 11th July 2025 (originally posted 11th
July 2025)
© Forward Computing and Control Pty. Ltd. NSW
Australia
All rights reserved.
Table of Contents
Summary
An
Example of Bill Shock from a Demand Tariff
How
to Avoid Demand Charges with a Tariff Change
How
to Avoid Demand Charges with a Battery System
Demand
Charges in Detail
How you should Modify your
Usage to Minimise the Demand Charge
Conclusion
If you want less stress in your life, DO NOT choose an electricity tariff that has a Demand component. Instead choose a Flat Rate or TimeOfUse (TOU) tariff. These may look more expensive in cost per kWh but you will avoid bill shocks and not spend every evening worrying about what is switched on for how long.
You rang up an electricity retailer looking for a better tariff and got talked into one with a Demand component. The price per kWh looked cheap at $0.27/kWh and the sales person said they work on a 2kW number for the extra demand tariff which adds $15.00 to the bill each month. The calculation of the demand charge is 2kW x $0.25 x 30 days = $15.00 This is in addition to the connection fee of $0.90 /day ($27/month) for a total of $42/month plus your electricity usage at $0.27/kWh. This appeared to be much cheaper than your current Flat Rate / TimeOfUse bill so you agree to switch.
The weather is mild for the next few weeks. You come home in the evenings and cook dinner, have lights on, the fridge is running, TV on, all the normal things. With the hotplate clicking on/off, the fridge turning on/off and boiling the jug, average kW load of appliances that are running for any half hour is about 2kW.
Then there is a cold snap for just one day. You come home and turn the heaters/air con, but only for 30mins, to warm the house up. You do a quick sum, running heaters in two rooms, each 2.4kW, running them for a whole 1hr costs 2 x 2.4kW x 1h x $0.27/kWh or about $1.30, so only running them for ½ hr will be about $0.65 extra cost.
BUT those heater add another 2 x 2.4kW to your average 2 kW load for that 30min period which more than triples your Demand Charge. At the end of the month you are surprised to see the Demand Charge component of your bill is not $15.00 but $51.00. Plus your $27/month connection fee AND the charge for the kWh you used.
The demand charge is 2 x 2.4kW (heaters) + 2kW (cooking lights etc) = 6.8kW x $0.25 x 30 day = $51. So you extra $0.65 of power for 30 min on one day actually cost you $40.65 for the month
The point to note here is that if you use more power for just one 30min period you will be charged the extra demand for the WHOLE month. So just one cold day will boost your electricity bill.
Of course being electricity pricing, it is not as simple as that. Depending on how your retailer sets their plans, the extra demand pricing could only apply Mondays to Fridays between 2pm and 8pm December to February and July to August and the 30min periods are fixed half hours 2pm to 2:30pm, 2:30pm to 3pm, etc. All of which adds to the stress of juggling power usage.
If you don't have a battery system, the only way to avoid Demand charges is to choose another sort of tariff, Flat Rate (Flat without Demand) or Time Of Use (TOU)
Flat Rate tariffs have a fix cost per kWh. So matter when you boil your kettle it will cost the same.
A Time of Use tariff charges different amounts for each kWh depending on the time of day. The actual rates and times depend on the retailer. Typically there are Peak, Shoulder and Off-Peak times. Peak times are when most people are using power. For example 2pm to 8pm, Monday to Friday and might be charged at 50c/kWh. While 10pm to 6am is only charged at 20c/kWh. The idea is to encourage you to use less power in peak times. The power stations and transmission lines need to be able to supply the peak load. A higher peak load means more power stations and transmission lines need to be built.
Working out how much your power is costing you if you have a time of use tariff is straight forward. Multiply the kW of the appliance by the number of min it is on divided by 60 and then multiply by the cost $/kW that is being charged at that time of day.
If you have a large enough battery system, you can avoid the Demand Charges by charging the battery up before the Peak Period (2pm to 8pm) each day and then drawing down from the battery between 2pm and 8pm. If you have Solar then it can charge the battery, when there is sun. In any case, tariffs with demand charges usually have a `cheaper flat rate of the $/kWh, so there is no disadvantage to charging up the battery from the grid, prior to 2pm, if the Solar is not sufficient. If the battery capacity is not sufficient to supply all your power needs between 2pm and 8pm on cold days, limit the discharge rate from the battery so that it provides most of the kWh each 30min with the grid making up the small remaining bit so minimising any demand charge.
Tariffs with demand charges typically have a flat rate for the $/kWh through out the day, but apply an additional charge, expressed in $/kW per day, for using power during a peak period, say 2pm to 8pm. This will be covered in detail below. One negative aspect of demand charges is that your maximum demand kW will be multiplied by the $/kW and then also multiplied by the number of days in your monthly billing cycle.
So just one day of heavy power use will result in a demand change that is then multiplied by 30 days (for a 30 day month) even if the heavy use is only for 30min of one day that month.
Demand Charges are confusing. The Demand Charge kW is NOT the
peak kW you used. It is actually the highest average kW used over
a time period, typically 30mins. See the example calculations
below,
Don't expect your retailer to explain it correctly to you.
Even the customer service staff at Ausgrid did not know the details
of how it is calculated.
To work out your demand charge you first need to work out the kW number to use with the $/kW per day cost. Ausgrids ‘Appendix E – Calculation of Power from Interval Data’ in Ausgrid’s ES7 Network Price Guide (July 2025) supplies the details of the calculation. A local copy of Appendix E is here. If you have large electric motors or large air conditioners the calculation gets complicated by the additional of extra factors, but for most households those extra factors can be ignored in order to get an approximate value for the kW. kWh over 30 min x 2 = kW Demand Charge (approximately)
So ignoring large motors and air conditioners, to calculate the
demand charge kW you actually use the kWh consumed over the 30min
period then multiply that by 2 to get the kWh over 1hr and divide by
1hr to get the kW number to use for the demand charge. That is
kWh
in 1/2hr x 2 = kW for demand charge.
Lets consider a hotplate (2kW) turned on for 10mins and a kettle (2kW) turned on for 1min and a plug in room heater (2.4kW) running for the whole 30mins.
The hotplate is using 2kW for 10mins =
2kW x 10/60hr = 0.333Wh.
The kettle using 2kW for 1min = 2kW x
1/60hr = 0.033kWh.
The room heater uses 2.4 kW for the whole 30min
= 2.4kW x 30/60hr = 1.2kWh
Adding those kWh together gives 0.333 + 0.033 + 1.2 = 1.566kWh used over 30mins.
Using the formula above
kW (demand
charge) = 1.5666 x 2 = 3.132kW
Note: This is the AVERAGE kW in use over the 30min, NOT the the peak kW. The peak kW is when the hotplate and kettle and heater are all on at the same time and is 2 + 2 + 2.4 = 6.4kW
It does not matter how many appliances you have on at one time. What matters is how many kWh you use in the whole 30min period.
To find your actual Demand Charge kW you need to do the above calculation for every 30min period of the peak time for every day of the month and then find the largest result. That is your Demand Charge kW for that month.
As the example above showed it is NOT how many appliances you have on at one time, but rather how long you run the appliances within a 30min period.
So in the above example the room heater was the main contributor
to the demand kW. So instead of running the heater continuously for
30 min to heat the room up on coming home, choose to only run it for
15min each 30min to heat the room up more slowly. Doing this halves
the room heater contribution to the demand kW to 0.6kWh (1.2kWh /
2)
So the demand calculation is now
0.333kWh + 0.033kWh +
0.6kWh = 0.966kWh => 0.966kWh x 2 => 1.932kW demand so
the extra demand charge would now be 40% less
For other large kW appliances,
run them in different 30min periods to minimise their contribution to
the demand kW.
If you have a demand tariff, there is no way to
avoid the additional charge, unless
you have a battery.
This page covered how to calculate electricity Demand Charge kW and how to minimise or avoid them. If you don't have a battery system, the only way to avoid demand charges is to change your electricity contract to one that does not have a demand charge. If you are on a demand charge tariff now, you can minimise it by spreading out the appliances you use into different 30 min periods. It you are running high power appliances, then run them for short periods each 30min instead of continuously for a whole 30mins.
If you have a battery system then make sure it is charged up before the peak times start and use it instead of the drawing from the grid. If the battery capacity is not sufficient to supply all your power needs between 2pm and 8pm on cold days, limit the discharge rate from the battery so that it provides most of the kWh each 30min with the grid making up the small remaining bit.
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