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Experts sound alarm on complex household energy tariffs

Households are being advised to avoid electricity plans with 'demand pricing', traditionally reserved for large businesses.

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Last updated: 20 June 2022
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Need to know

  • Demand tariffs are a way for electricity providers to charge customers for the amount of demand they put on the grid
  • This pricing scheme has traditionally been used for large power customers, but is now creeping in to residential power plans
  • Experts warn the scheme is complex and unsuitable for most residential customers

Energy experts are warning consumers to watch out for 'demand tariffs' on their bill. The warning comes after one residential customer contacted CHOICE when he discovered he was being billed under the complex tariff system.

Market specialists say households should avoid plans with demand pricing, which is usually reserved for businesses and other heavy power users.

What are demand tariffs?

Demand tariffs are a form of charging for electricity that measures how much demand an energy user is putting on the network and then charges them accordingly.

This charge appears on a customer's bill, on top of other costs for electricity usage and supply.

His energy retailer AGL had moved him to a new pricing structure that included demand charges

Experts say the tariffs are rare in residential plans, but in May this year Sydney resident John Szybowski discovered that his energy retailer AGL had moved him without warning to a new pricing structure that included demand charges.

AGL told Szybowski that they'd done so because of changes to his meter configuration, but the 57 year-old says he'd been on a time-of-use plan without demand charges with AGL on the same meter for just over a year.

"They put me on something that's normally aimed at businesses," he tells CHOICE. "I wasn't on demand pricing when the meter was new and it's the same meter. There's been no upgrade."

'Extremely unusual'

Victoria University energy economist Professor Bruce Mountain says the change is odd because demand tariffs have traditionally been levied against customers who use lots of power, such as businesses.

"They are extremely unusual for small customers simply because they are extraordinarily complex," says Mountain. "[Retailers] don't win customers with these sorts of charges and customers don't like it because it's terrifically complex."

A complicated system for households

Under the AGL system, Szybowski's electricity use is measured every 30 minutes between set times on working weekdays.

The peak usage figure recorded is then multiplied by a cents per kilowatt rate and multiplied again by the number of days in the month. This figure then becomes the demand charge for that month.

The rate at which the demand charge is tallied changes with the seasons throughout the year, from 'low' to 'high' periods.

Szybowski's plan also charges him for how much electricity he uses overall, filtering his consumption through peak, off-peak and shoulder periods – in the time-of-use style.

But unlike a normal time-of-use scheme, the rates for these periods are all the same and come in cheaper than the average usage rate he was paying on his original plan.

As with other demand pricing schemes, the AGL demand tariff is designed to bill users for how much strain they're putting on the electricity grid.

Energy retailers likely to benefit

So could demand tariffs lead to lower energy bills for customers? Probably not, says Mountain. He argues that their complexity makes them unsuitable for ordinary households, with any advantages likely to go to power retailers.

"The benefit is most likely to end up with the retailer because the customer will be in a weak position to determine if they're getting a good deal," he tells CHOICE. "You've got to be a pretty astute customer to figure out when you're not doing well on them."

The benefit is most likely to end up with the retailer because the customer will be in a weak position to determine if they're getting a good deal

Professor Bruce Mountain, Victoria University

Energy consultant Dr Hugh Outhred warns residential customers on demand pricing schemes will have to be vigilant if they're going to come out on top of their retailer.

"If you're going to try and reduce the demand charge, you have to develop an understanding of how much electricity each of your electrical appliances uses," he says. 

"Then you have to be on your guard every half hour when you have any of your heavier-use appliances or a lot of your smaller-use appliances turned on: 'What appliances are turned on? What should I be turning off?' and you can never relax during those periods."

Warnings for ordinary customers

Responding to our questions, AGL says there are instances when a customer's tariff may be changed, such as when the power distributor alters the network tariff codes.

Ausgrid, Szybowski's distributor under his plan with AGL, started moving residential and small business connections onto demand tariffs in 2019 if they were new customers or upgrading to a smart meter.

Ausgrid didn't respond to our questions about demand charges on its network. But it has previously said small connections will benefit from demand pricing and it's up to the retailers on its network to decide whether (and how) they pass on the new tariffs.

The Energy & Water Ombudsman NSW says it has received a number of complaints from customers who were unexpectedly put on a new tariff by their retailer after getting a new meter.

Customers often receive no notice from the retailer that their tariff will be changed after a new meter is installed

NSW Energy and Water Ombudsman Janine Young

Ombudsman Janine Young argues demand charges and other 'cost-reflective' tariffs can lead to higher bills, and retailers need to be more "proactive" in educating customers about them.

"Cost-reflective tariffs can result in higher household energy costs for some customers, yet customers often receive no notice from the retailer that their tariff will be changed after a new meter is installed – this needs to change," she says.

In response to our query, AGL didn't say how many of its residential customers in Australia are being charged demand tariffs.

But a spokesperson for the company did say customers in NSW and Queensland who've been assigned a demand tariff can opt out to a time-of-use one.

'Avoid it like the plague'

Szybowski says he's looked at the paperwork required for moving back to the plan he was originally on. He says he found it complex and that dealing with AGL is confusing.

For now, the telecom sector worker is using detailed data he's collected on his previous electricity usage to see if he can make the plan work for him, but is concerned at what demand pricing could mean for ordinary households.

"I'll delve into [demand pricing] and understand some of the concepts of usage and so on, but if it's just the average family and they get put on this thing and they don't understand the implications, they might get stung with a big bill," he says.

Professor Mountain is more direct in his advice to residential customers who are considering a demand pricing plan, warning it's difficult to predict how much you could end up paying.

"Avoid it like the plague," he says. "Go for the simplest option you can find and compare the market to that. There's huge disparity between offers, but you can only get those better deals if you're able to compare effectively."

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