What Peak Demand Tariffs mean for consumers
Dr Martin Gill
The Australian Energy Market Commission (AEMC) requires distribution businesses to introduce peak demand tariffs.
The AEMC claims this will benefit consumers but analysis shows this is not the case.
Article Summary
The Australian Energy Market Commission (AEMC) is
forcing the introduction of consumer network
demand tariffs. For consumers network demand
tariffs:
 Do not provide sustainable savings for “80% of
consumers” as suggested by the AEMC
 Increase electricity costs for the majority of typical
consumers
 Reward inefficient energy users at the expense of
efficient energy users
 Make electricity costs even more difficult to
understand
The AEMC’s decision to force the introduction of
network peak demand tariffs is not in the long term
interest of consumers.
Introduction
The AEMC sets the rules governing Australia’s
incredibly complex National Electricity Market.
Recently they updated these rules to require
distribution businesses to offer network Peak Demand
Tariffs. The following figure is taken from a 2016
AEMC presentation [Ref 1].
While the AEMC claim “Over 80% of consumers” will
pay lower charges on network demand tariffs their
documentation fails to provide a convincing
argument. Consumers are interested in is how much
they might save on a demand tariff. Analysis suggests
far from saving most consumers will end up paying
more.
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Analysis of electricity use by 8000 Sydney
consumers suggests the introduction of demand
tariffs results in higher electricity bills
What is a Peak Demand Tariff?
Traditional consumer electricity bills are calculated
using the amount of electricity used.
On a Peak Demand Tariff consumers still pay for the
amount of electricity they use plus a fee based on
their Peak Demand.
The additional fee is intended to recover the impact of
consumer electricity use on distribution networks.
Explaining the “logic” of network demand tariffs
From the start it is important to understand the
difference between generation capacity and network
capacity. The South Australian blackouts were caused
by a lack of generation capacity, not a lack of network
capacity. The new AEMC rules only address network
capacity.
Using an analogy. For several decades the amount of
cargo being carried by a trucking company has been
increasing steadily. As a result the company is
continuously told to buy more trucks. Then instead of
the amount of cargo increasing it starts to fall.
Unfortunately the company continues to buy more
trucks. After a couple of years the company has far
too many trucks which are not being used. The
company still pays for all the unused trucks.
This is exactly what has happened to distribution
networks. In 2008 peak network demand stopped
growing and for the past decade it has been falling.
Unfortunately the regulator continued to advise
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What Peak Demand Tariffs mean for consumers
distributors to install more network capacity (buy
more trucks). Aside: The SA blackout suggest this
network capacity is unlikely to ever be used because
there is now insufficient generation capacity.
The AEMC is using economic theory to suggest an
alternative strategy to buying more trucks, which is to
increase prices. By increasing prices the AEMC hopes
to reduce demand allowing existing network capacity
to meet future requirements.
Despite increasing prices the AEMC claims “80% of
consumers benefit” from the introduction of network
demand tariffs. This can only occur if demand tariffs
avoid adding network capacity (buying more trucks).
This overlooks existing excess network capacity able
to meet foreseeable peak demand.
The AEMC’s decision to increase electricity prices to
reduce demand does not result in consumer benefits
because distributors can’t return the excess network
capacity they have already installed for a refund.
Approach
Using detailed electricity data from 8000 Sydney
consumers [Ref 2] the following undertakes analysis
of demand tariffs. It uses the electricity data to design
a demand tariff ensuring “80% of consumers benefit”.
The analysis shows this tariff leads to a significant
decrease in distributor income. Analysis of historical
network demand shows there is already sufficient
network capacity. The combined result is the AEMC’s
own rules dictate electricity prices must rise. The
conclusion is the benefits promised by the AEMC
cannot be delivered.
An example of a Demand Tariff
The Queensland distributor Energex has introduced a
consumer network peak demand tariff as required by
the AEMC. The details of their demand tariff are
shown in the following table [Ref 3].
Demand Tariff
Demand Usage Charge
Demand Charge
Fixed Tariff
Usage Charge
The AEMC does not define how distributors should
measure peak demand1. Energex has chosen to use
the “maximum amount of electricity used in a
30 minute period, between 4 to 8pm workdays”. The
maximum value is determined each calendar month
and used to calculate the electricity bill.
Savings on the Energex demand tariff
The following figure shows the potential annual
savings for 8000 NSW consumers on the Energex
demand tariff compared to the Energex fixed tariff.
Analysis reveals on average NSW consumers would be
$22 a year worse off on the demand tariff.
Significantly only 35% of consumers save on this
demand tariff, not the 80% claimed by the AEMC.
The results are concerning and justify further
investigation.
Designing a tariff so ‘80% of NSW consumers benefit’
The following analysis assumes a fixed tariff of
11.623c/kWh. In fact the distributor Ausgrid offers a
block tariff. The price differences between the blocks
are small so using a fixed value is considered
sufficiently accurate.
Using the AEMC claim “80% of consumers pay lower
charges on a demand tariff” it is possible to estimate
the tariff(s) used in their modelling. The design of the
tariff starts with the assumed discount on electricity
use. A search is then performed for the Demand
Charge lowering electricity costs for 80% of
consumers. The result is shown in the following figure.
5.716 c/kWh
$7.841/kW/month
11.623 c/kWh
Usage charges on a demand tariff should be less than
the fixed tariff. Energex has chosen to offer a
substantial 50% discount on the usage charge.
1
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This point is discussed in the Appendix
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What Peak Demand Tariffs mean for consumers
Analysis shows increasing the Usage Charge by 17%
results in almost identical results to the earlier
analysis of the Energex demand tariff.
The above figure2 reveals for 80% of NSW consumers
to benefit the Demand Charge must be
$4.932/kW/month when a 50% discount off usage
charges is proposed. This demand charge is less than
Energex’s demand charge.
Maintaining Distributor Income
If 80% of consumers pay lower electricity
costs then who is paying the difference?
The analysis has revealed the demand tariffs needed
to meet the AEMC’s claim “80% of consumers will pay
lower annual electricity bills”. It is now possible to
estimate the effect of demand tariffs on distributor
income. The following figure assumes consumers
paying less on a demand charge change to the
demand tariff.
The above figure shows if 80% of consumers pay less
then distributor income decreases 17.4% (when the
discount off usage charges is 50%).
Rules set by the AEMC ensure distributors can recover
the cost to provide and maintain their networks (often
referred to as “the poles and wires”). Since the
introduction of demand tariffs does not reduce these
costs (this is discussed in the next section) the AEMC’s
own rules ensure distributors can increase prices to
recover the lost income.
2
Those intrigued why the result is a straight line are
encouraged to refer to the Appendix.
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It is asserted Energex have (correctly) designed their
demand tariff to maintain distributor income. Unlike
the AEMC they do not forecast the introduction of
demand tariffs to result in a significant decrease in
costs to maintain and operate their network.
Analysis of network savings
Historically electricity demand has continued to grow
at a steady rate. Demand growth forces distribution
businesses to increase the capacity of their networks
which is expensive. The AEMC hopes higher prices will
reduce demand avoiding costs to increase the
capacity of the distribution network. They are wrong.
Prior to 2008 peak electricity demand grew at a
steady rate. Assuming this trend would continue
regulator forecasts encouraged distribution
businesses to continue increasing the capacity of their
networks.
The above figure shows NSW monthly peak demand
from 1999 to 2017 [Ref 4]. Prior to 2008 peak network
demand grew steadily. The market regulator used this
historical data to forecast required future network
capacity. Unfortunately for consumers the figure
shows in 2008 peak demand stopped growing.
The summer of 2017 was the hottest in Sydney for
157 years. Despite this peak network demand was
lower than demand a decade earlier. A simple linear
fit through the historical data suggests even during
the heatwave there was 3GW of spare network
capacity.
Existing networks have the capacity to meet peak
demand for the foreseeable future. For example the
forecast uptake of domestic battery storage systems
will further reduce network peak demand.
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What Peak Demand Tariffs mean for consumers
In this light the AEMC’s decision to introduce complex
demand tariffs is an attempt to solve a problem that
no longer exists. The AEMC is ignoring data showing
peak demand has not increased for a decade and
forward forecasts of the effects of new technology.
If the AEMC genuinely wants to avoid further
increases to electricity prices then they should stop
encouraging distributors to invest in unneeded
network capacity. The introduction of complex
demand tariffs does not achieve this.
Which consumers benefit on a demand tariff?
The following figure plots annual savings against
average daily electricity use (using the Energex
demand tariff).
$740 a year more on the demand tariff! By
comparison the largest saving is only $172.
Demand tariffs result in higher electricity bills for the
vast majority of consumers. For this reason consumers
will not voluntarily choose demand tariffs. If the
AEMC believes demand tariffs are in the long term
interest of consumers they will have to legislate to
force consumers onto these tariffs.
Earlier attempts to force consumers to accept tariffs
proved highly unpopular. For example both Victoria
and NSW attempted to force consumers to accept
Time of Use tariffs. In both states the resulting
consumer backlash resulted in the Government
reversing the decision allowing consumers to choose.
The unpopularity of Time of Use tariffs is relevant to
demand tariffs. Peak Demand is typically measured
during specific hours of the day, hence demand tariffs
actually hide a Time of Use payment. Specifically the
bill is based on electricity use occurring during a single
30 minute period each month.
There are other consequences of consumer demand
tariffs.
High energy users benefit from demand tariffs. The
figure shows consumers using more than double the
typical average daily use of a four person household
can reduce their annual electricity costs by an average
of $380.
The situation for typical consumers is far less positive.
 They may lead to more electricity disconnections.
Most consumers receive their electricity bill three
months after they use the electricity. On a demand
tariff monthly bills from Sept to Feb tend to be
higher increasing financial stress on vulnerable
consumers [Ref 5].
 Solar systems reduce the amount of electricity
used but do not reduce peak demand from 4pm to
8pm. Hence demand tariffs reduce the financial
benefits of installing a domestic solar system.
These topics are explored in the Appendix.
Tools to compare Demand Tariffs
Of the 8000 consumers 63% use less than
15 kWh/day. The figure shows only 20% of these
typical consumers benefit from a demand tariff. On
average a demand tariff increases annual electricity
costs by $65.
The average value hides the significant downside of
demand tariffs. Some of the typical consumers pay
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The AEMC assumes consumers will voluntarily move
to demand tariffs when they realise the “savings”.
Unfortunately this is only true if consumers are willing
and able to compare the tariffs, but the Government
provided tariff comparison website EnergyMadeEasy
does not support Demand Tariffs.
The AEMC has not provided any tools to allow
consumers to compare demand tariffs
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What Peak Demand Tariffs mean for consumers
The vast majority of consumers do not understand
how their use of various household appliances is
related to the electricity bill they receive. Demand
tariffs make the link between appliance use and the
electricity bill even more complex. Rather than
introduce more complex tariffs the AEMC should be
focussing on consumer education.
Conclusion
Demand tariffs make sense for large commercial and
industrial users, where special equipment must
usually be installed. Analysis suggests the AEMC’s
decision to force network demand tariffs on domestic
consumers is not in their long term interest. These
tariffs lead directly to increased electricity costs for
the majority of consumers.
Citation
About Dr Martin Gill
Dr Martin Gill is an independent consultant
specialising in the provision of consumer advice. This
advice is based on a deep understanding of the
Australian energy industry and strong analytical skills.
As a consultant he has prepared advice for consumer
advocates, government regulators, electricity
distributors, electricity retailers, asset operators and
equipment vendors.
Dr Gill is a metering expert. During the National Smart
Metering Program he facilitated the development of a
specification for Australian smart meters. Innovative
metering products developed by his teams have been
externally recognised with the Green Globe Award,
NSW Government’s Premier’s Award and Best New
Product by the Australian Electrical and Electronics
Manufacturers Association.
Copyright of this article remains with Dr Martin Gill.
All references to this article should include the
author’s name and website www.drmartingill.com.au.
He has a broad technical background having
personally developed advanced communication
modems, burglar alarms, electricity meters, high
voltage fault monitors and power quality analysers.
Comments or Questions?
Appendices
The author is happy to receive comments or questions
about this article. He can be contacted at
Weights and Measures legislation
References
1. How the AEMC is responding to a consumer driven
transformation of the electricity market, Richard
Owens, Oct 2016
2. Smart Grid Smart City data set (formerly available
from data.gov.au)
3. Energex Tariff Schedule 2016-17.
4. AEMO Historical Network Data (aemo.com.au)
5. Households in the Dark, St Vincent de Paul,
May 2016.
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All devices used to bill customers are covered by
legislation ensuring the resulting bills are correct and
accurate. These legal requirements cover petrol
pumps, weight scales, electricity meters, etc.
It is relevant to note the legal requirements for
electricity meters do not check how electricity meters
measure Peak Demand.
The situation is made more complex with no common
definition of how ‘Peak Demand’ should be measured.
The AEMC makes no comment on this fundamental
oversight.
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What Peak Demand Tariffs mean for consumers
Analysis per month
For those interested in the mathematics …
Average costs on demand tariffs hide another
potentially alarming result. The following shows
saving per month on a demand tariff.
Explaining the linear result
A report by St Vincent de Paul [Ref 5] found
disconnections due to financial difficulty peak around
February. The above figure shows on a demand tariff
consumers generally pay more from Sept through Feb.
The combination of higher electricity bills, specifically
with increased costs appearing Jan and Feb bills
suggests network demand tariffs have the potential to
increase financial stress on vulnerable consumers
already struggling to pay electricity costs.
Comparing the cost of demand tariffs to fixed tariffs
involves calculating the Monthly BillUsage and
Monthly BillDemand. Rearranging the earlier equations
reveals consumers who save on the demand tariff are
those where:
The equation shows the ratio of Peak Demand to
Monthly Use determines the consumers benefiting
from a particular demand tariff.
Selecting a demand tariff where “80% of consumers
benefit” is equivalent to specifying the ratio of
Peak Demand / Monthly Use. For the analysed data
this ratio is fixed by the assumed percentage of
consumers who benefit.
Solar Systems
Domestic solar systems have proved a popular and
effective means of reducing annual electricity costs.
Unfortunately demand tariffs reduce the financial
benefits of solar systems.
The installation of a solar system results in lower
average daily electricity use. The presented analysis
shows consumers with lower electricity use pay more
on a demand tariff. The only exception would be if the
solar system reduced peak demand.
On the right hand side of the equation the analysis
has assumed the Usage Charge is a fixed value. Hence
plotting the Demand Charge against Discount results
in a straight line (as shown earlier).
The output of solar systems falls rapidly during the
afternoon. By 4pm solar systems are only outputting a
fraction of their rated power. The result is solar
systems do not reduce Peak Demand when measured
between 4pm and 8pm.
The AEMC’s introduction of demand tariffs reduces
the financial benefits of domestic solar systems.
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