Victoria’s Residential Demand Tariffs: Designed To Cripple Rooftop Solar?

an evil genius pasting demand tariffs to a solar panel

The Victorian demand tariff appears to be a cunning plan to slow the spread of solar.

Residential demand tariffs are now available in Australia, and I recommend you watch out for them. If you are a modest user of grid electricity, as many solar owners are, they have the ability to blow your electricity bill through the ceiling.

The South Australian demand tariff in particular can give such extreme charges it appears designed for comedic relief.  With some electric instant hot water heaters, just one 30-minute, hot shower could result in demand charges of over $1,000 being added to a quarterly bill.

I’ve written an introduction to demand tariffs here, but in this post I am going to concentrate on Victoria’s demand tariffs because Victoria is where the smart meters are.  It is the only state where most homes can get a demand tariff without changing their meter.

I will describe a residential demand tariff now available in south-east Melbourne. I’ll show how it can can save some households money while potentially costing others a fortune. Finally, I’ll describe how demand tariffs appear to be designed to reduce the uptake of rooftop solar and slow the rate at which Australia transitions to clean renewable energy.

The Details Of Victoria’s Residential Demand Tariff

Here is a summary of a Victorian residential demand tariff. It is currently available from Momentum Energy in the United Energy network area in south-east Melbourne:

Daily Suppy Charge 76.9 cents
First 6.58 kilowatt-hours in a day 16.6 cents
Each kilowatt-hour after the first 6.58 12.3 cents
Average cost per kilowatt-hour for household using 7,000 a year 13.8 cents
Daily capacity charge December through March 31.7 cents per kilowatt
Daily capacity charge April through November 14.2 cents per kilowatt
Minimum daily capacity charge 1.5 kilowatts
Comparable Victorian standard tariff 19 cents per kilowatt-hour

And you can download the full tariff details here.

As you can see, a household that uses the Melbourne average of 7,000 kilowatt-hours a year1 will pay considerably less per kilowatt-hour than if they were on a comparable standard tariff.

If costs per kilowatt-hour were the only consideration then the demand tariff would save money, reducing average electricity bills by $364 a year.  However, the household will have to pay an additional demand charge each day which can be large enough to eliminate any savings.

How Retailers Calculate Demand Charges

To determine how much your additional monthly demand charge will be, your retailer will first look at how you used electricity from 3pm to 9pm every day that month. That time period is divided into 30 minute chunks. The retailer then looks for the 30 minute period with the highest average power draw2.  From April through November that number of kilowatts will be multiplied by 14.171 cents. From December through March by 31.665 cents.  That amount is then applied to every day of that month regardless your grid usage on those days.

So if your household’s peak demand over a half hour interval from 3pm to 9pm was 5 kilowatts, then in July your monthly demand charge would be $21.97. In December it would be $47.50.

If a household’s demand charge was based on 5 kilowatts each month the total demand charges paid over a year would come to $364.64.

There is a minimum demand tariff of 1.5 kilowatts that will be charged even if a household used no grid electricity from 3pm to 9pm for the whole month.

South-East Melbourne Household Peak Demand

Household peak demand varies.  The graph below is for households in the United Energy network area in south-east Melbourne.  Each blue dot represents a household’s peak demand. The numbers on the left side of the graph show the number of kilowatts a demand tariff would have been based upon each month, averaged over a year.

graph showing victorian homes' peak demand

A graph of south-east Melbourne’s household peak demand in kilowatts on the left vertical axis. (Image credit: Rob Passey, Australian PV Institute)

The dots below the yellow line are households with a 30-minute peak demand less than 5 kilowatts. Looking at the graph, it is clear the majority of households would have their monthly demand charge based on an average of less than 5 kilowatts.

Demand Tariffs May Save Many Inefficient, Non-Solar Homes Money

A Melbourne household using 7,000 kilowatt-hours a year with monthly household peak demand from 3pm to 9pm averaging under 5 kilowatts would have lower electricity bills on a demand tariff than if they were on a comparable standard tariff.

Whether or not they would be better off compared to a time-of-use tariff without demand charges would depend on just when they use their electricity, but it is likely many households currently on time-of-use tariffs would be better off.

The more electricity a household uses, the lower the average cost they pay per kilowatt-hour for electricity, and so the more likely they are to benefit from being on a demand tariff.

Demand Tariffs Reduce The Incentive To Install Rooftop Solar

Anything that reduces the cost of grid electricity reduces the incentive to install rooftop solar by lowering the potential savings.  Demand tariffs go one step further though. They reduce the cost of electricity per kilowatt-hour significantly while clawing back most of that reduction with demand charges.  Solar saves money by reducing the amount of kilowatt-hours taken from the grid. It cannot reduce evening peaks3.  So households on a demand tariff will save less with solar compared to a standard tariff.

In fact, because Victoria’s demand tariff charges more for the first 6.58 kilowatt-hours used in a day, installing rooftop solar will increase the average cost per kilowatt-hour paid.  Reducing the amount of grid electricity used bumps up its average price on a demand tariff and provides a further disincentive to installing solar.

Demand Tariffs Are Not Rooftop Solar Kryptonite

While demand tariffs can and will reduce the incentive to install rooftop solar, their effect will be limited and won’t be nearly as great as some suggest or hope. Of course, if they were made compulsory, this would all change.

While those on a demand tariff will have a reduced incentive to install solar, savvy homeowners will realise that if they install a rooftop solar system, they can switch to a non-demand tariff.  Because people are not stuck with a demand tariff this removes a considerable amount of the disincentive.

Demand tariffs also improve the economics of adding battery storage. Widespread demand tariffs will give an advantage to batteries with high power outputs and smart software that can guarantee that there will be enough charge to lop every peak. This is important because if the software misses just one peak, then the whole month gets slugged with the daily demand charge.

One final effect may be minor, but could still be important.  Electricity tariffs are already confusing. At SolarQuotes we hear every day from homeowners on simple, standard tariffs who are bewildered and angry at the size of their bills.

The introduction of demand tariffs will make things worse.  Many people will try them in the mistaken belief they will save money due to a lower per-kWh charge. But they’ll up paying more.  Imagine their anger if they get a high bill with no corresponding increase in their usage. They will be motivated to reduce their reliance on the grid  by installing rooftop solar and will become more likely to take political action that supports solar.

Other Tariff Options Can Provide More Benefit To The Grid

The claimed purpose of demand tariffs is to reduce the cost of operating the grid by reducing peak grid demand. But as they are not well designed to do this. It seems to me that their true purpose is to retard the spread of rooftop solar.

It is not clear that they are any more effective at reducing peak demand than time-of-use tariffs without demand charges.  Other tariff structures such as dynamic tariffs can be much more effective, but they provide less of a disincentive to install rooftop solar and I presume that is the reason why they are not available.

Demand Tariffs Result In The Poor Subsidizing The Rich

Demand tariffs also have a distributional issue.  They allow larger users of electricity to pay less.  Some of these large users are merely big families that are not particularly rich. But on average it means the wealthy will pay proportionately less for electricity than the poor, the environmentally conscious, the efficient or the thrifty.  This is not fair from a distributional point of view and very stupid from an environmental one.

Demand Tariffs Are Bad For The Environment

If Victoria’s electricity was mostly from clean energy sources I would not be too worried about the introduction of demand tariffs. But this is not the case, Victoria’s electricity sector is the most carbon intensive in the developed world.  Grid generation in the state is contributing to increasing world temperatures, the bleaching of coral, increasing bush fire risk, extreme weather events, droughts, crop failures, and directly contributing to deaths from heatstroke.

Any change in electricity tariffs that slows the uptake of clean energy is a step in the wrong direction. I implore Victorians to carefully consider their options before before signing up to a residential demand tariff and to fiercely resist any push to make them compulsory.

Footnotes

  1. the average for a 3 person Melbourne home without gas
  2. They do this by simply multiplying the kWh drawn in 30 minutes by 2
  3. Unless you invest in a big-ass battery with enough power
About Ronald Brakels

Many years ago now, Ronald Brakels was born in Toowoomba. He first rose to international prominence when his township took up a collection to send him to Japan, which was the furthest they could manage with the money they raised. He became passionately interested in environmental matters upon his return to Australia when the local Mayor met him at the airport and explained it was far too dangerous for him to return to Toowoomba on account of climate change and mutant attack goats. Ronald then moved to a property in the Adelaide Hills where he now lives with his horse, Tonto 23.

Comments

  1. This is our experience with a 5.75 kW Micro Inverter System. On average per day we consume 24.8 kWH made up of 11.9 kWH from the grid [Ergon Tariff 11 $0.27071 per kWH] 21.5 kWH from Solar [Free] and 8.6 kWH [$0.07448 per kWH] feed to the grid. We run a split Solar Hot Water system the pump always on and booster [time switched to 8:00 – 11:00 when solar power is available] also connected to tariff 11. We run a pool pump time switched 10:00 – 16:00. From a billing perspective the cost of hot water in our quarterly bill is minimal. Ergon has recently adjusted its pricing on both Meter and Supply charges so in our case connected to the grid but not drawing any power our annual unavoidable cost would be Metering $35.29 and Supply $359.63. Our next step is to convert the 8.6 kWH we feed to the grid into storage to be used outside day light hours. This has a net annual value of approximately $615.97 based on the tariff rates that apply to us. Our ROI ($10,500) based on our systems performance is approximately 14.37% pa tax free. When it comes to solar it requires a time of use discipline covering when you use appliances like Dishwashers, Stoves, Washing Machines and the like.

  2. Steve Fuller says

    We need to demand that every electricity consumer is enrolled in a mathematics degree course in order to understand electricity billing, paid for by the electricity companies.

    • If you can write formulae in say Excel or Numbers you might already be qualified.

      • Steve Fuller says

        Nup…………………..

        • http://www.solarquotes.com.au/blog/wp-content/uploads/2016/08/vic-demand-tariff.pdf having read that I would agree you might need a degree in rocket science to make sense of it. The elephant in the room is who would know the maximum energy used in a 30 minute time period in any one period on which the cost for that interval is calculated. Someone has been researching and perhaps adopted a billing strategy that underpins some mobile phone plans which for some deliver what is called ‘Bill Shock’. Some time ago providers of financial services were obliged to set out in plain english using every day language the financial arrangements being entered into. On the basis of the published VIC-Demand Tariff plan does it fail to meet a standard where a reasonable person would reasonably understand the deal but more to the point have available all the data required to validate the billing?

  3. Without trying to point out the simplicity of this argument I thought I would point out how I have approached this measurement.

    My office and home both have 5.75kwh systems , straight away the power bills dropped by 40% the savings will pay off the systems (purchased after govt rebate for $3,200 each).

    This will mean each system will go into positive returns in 2.5 years from these efforts eg 40% bill reduction.

    If I change habits that could save more $$$ = free return on effort.

    When we upgrade lights and appliances or even a battery storage system, ultimatley we review the cost v energy output or benefit and lifespan of appliances or system and make a commercial decision, its why we waited on solar for the cost to drop selling electricity isn’t the plan … the plan is to stop buying electricity therefore stop production of green house gasses.

    I feel that by compartmented strategy is a way of evaluation each process of change if you combine them all it becomes a difficult formula , by sepperatley assesing each action we keep it simple to understand and asses .

    The biggest issue is quality of solar system and battery’s if it has to be replaced then the cost cycle starts again.

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