Demand Charge

How demand charges work

Most residential tariffs charge purely by energy consumption (kWh). Demand charges add a second dimension: they charge based on the highest rate of power draw during a billing period.

A typical commercial demand charge might be $15–$25/kW/month. If a business hits a peak of 40 kW at any point during the month - even for just 15 minutes - the demand charge is 40 × $20 = $800 that month, on top of the energy charge.

The charge reflects the network’s cost of infrastructure sizing. The grid has to be built to handle the worst-case draw of every connected customer simultaneously. A customer whose peak demand is high but whose average demand is low (say, a factory that only runs one large motor occasionally) uses a disproportionate share of infrastructure capacity.

Demand tariffs for residential customers

Some Australian network operators have introduced demand tariffs for residential customers, particularly as smart metering has made measurement practical. Ausgrid’s EA010 tariff is a frequently discussed example - it includes a demand component based on peak demand during a defined window.

Most residential retailers shield customers from network demand charges by offering flat or TOU retail tariffs - the retailer absorbs the demand charge risk. But as demand tariffs become more common in network pricing, some retailers are passing them through or designing residential products that include a demand component.

Battery storage as a demand charge management tool

For commercial customers on demand tariffs, battery storage can pay for itself primarily through demand charge reduction (peak shaving) rather than energy arbitrage. The battery monitors real-time demand and discharges when it detects an impending peak, capping the maximum draw below the demand charge threshold.

A 30 kWh commercial battery shaving a 40 kW peak down to 25 kW at $20/kW/month saves $300/month - $3,600/year - which represents a strong ROI even before energy savings. This is a well-established commercial application in the US and is emerging in Australian C&I (commercial and industrial) markets.

Residential demand charges remain a contested policy area in Australia. Consumer groups have raised concerns that demand tariffs disadvantage low-income households and those without the means to invest in demand management technology.