For many businesses, electricity costs are not determined only by how much energy is consumed.
They can also be affected by how much electricity the business requires at the same time.
That is where demand charges and demand tariffs become important.
A business may use a reasonable amount of electricity across an entire month but still experience a high demand charge because several large electrical loads operated simultaneously for a relatively short period.
Understanding this distinction can help businesses identify what is driving their electricity costs and where operational changes, solar, battery storage or smarter energy management may help.
What Are Electricity Demand Charges?
Most people are familiar with paying for electricity according to how much energy they consume.
That consumption is generally measured in kilowatt-hours (kWh).
A demand charge works differently.
Australian Government guidance describes a demand charge as being based on the highest amount of power drawn from the electricity grid at a particular time: the customer's peak demand.
For a business, this can occur when multiple high-powered systems operate simultaneously.
Examples might include:
- air conditioning
- refrigeration
- electric heating
- pumps
- compressors
- commercial kitchen equipment
- manufacturing machinery
- EV charging
- other large electrical equipment.
Demand charges are designed to reflect, in part, the network capacity required to supply customers when they place high loads on the electricity system.
This means two businesses that consume a similar amount of electricity over a month can potentially have different electricity costs if their peak-demand patterns differ.
What Is a Demand Tariff?
A demand tariff is an electricity pricing structure that includes a charge related to the customer's maximum or peak electricity demand.
Australian Government guidance notes that demand tariffs can take different forms.
Depending on the pricing plan, demand may be based on:
- the highest demand during a month
- the highest demand during particular peak periods
- a daily demand calculation
- another methodology defined by the applicable tariff.
Demand charges can appear alongside other electricity charges, such as:
- daily supply charges
- electricity consumption charges
- time-of-use charges
- network charges.
The exact structure varies between retailers, distribution networks, customer types and locations.
Demand Charges vs Electricity Usage Charges
| Measure | Usage Charge | Demand Charge |
|---|---|---|
| What it measures | Total electricity consumed | Peak level of electricity demand |
| Common unit | kWh | kW or sometimes kVA |
| Affected by | How much electricity is used | How much power is required at once |
| Example | Energy consumed throughout the month | A high simultaneous load during the relevant demand period |
| Can solar help? | Potentially, by reducing grid electricity consumption | Potentially, if solar output coincides with the site's demand peak |
| Can batteries help? | Potentially | Potentially, by supplying power during demand peaks |
The distinction between consumption and demand is fundamental.
A business can reduce total electricity consumption without necessarily reducing its maximum demand.
Similarly, a business may be able to reduce demand peaks without dramatically changing its total monthly energy consumption.
kW vs kWh: Why the Difference Matters
Understanding kW vs kWh makes demand charges much easier to understand.
Kilowatt (kW)
A kilowatt measures power.
It describes the rate at which electricity is being used at a particular point in time.
For example, when several pieces of equipment operate simultaneously, the site's total power requirement can increase sharply.
Kilowatt-Hour (kWh)
A kilowatt-hour measures energy consumption over time.
If a 10kW electrical load operated continuously for one hour, it would use approximately 10kWh of energy.
Demand charges are concerned primarily with the level of power required during the relevant demand measurement period, while normal consumption charges relate to the amount of energy used.
How Are Demand Charges Calculated?
There is no universal Australian calculation.
The applicable method depends on the electricity plan, network tariff and site.
Australian Government guidance explains that some demand tariffs may use the highest demand in the year or month, while others may focus on demand during specified peak periods.
For larger energy users, maximum demand may be charged in dollars per kilowatt ($/kW) or dollars per kilovolt-ampere ($/kVA), depending on the arrangement.
A simplified conceptual formula is:
This is an educational example only. Actual tariffs may use different measurement intervals, time windows, seasonal rules, minimum demand levels, ratchets or other calculation methods.
Simplified Example
Suppose a business's applicable demand tariff measured a peak demand of:
100kW
and, purely for illustration, the relevant demand rate were:
$15 per kW
A simplified calculation would be:
That does not mean every business with a 100kW peak would pay $1,500.
The example simply demonstrates why a relatively short demand spike can matter when a tariff includes demand-based charging.
The actual rate and methodology must be taken from the site's electricity contract and applicable tariff. The $15 per kW figure is illustrative only and is not a current tariff.
What Can Cause High Peak Demand?
Peak demand often occurs when multiple electrical loads operate at the same time.
For example, imagine a business starts operations in the morning and simultaneously activates:
- air conditioning
- refrigeration equipment
- machinery
- pumps
- water heating
- EV chargers.
Individually, each system may be reasonable.
Together, they can create a short but significant increase in the site's electricity demand.
Other potential causes include:
- equipment startup
- production schedules
- simultaneous EV charging
- extreme weather and HVAC demand
- refrigeration cycles
- electric heating
- process equipment
- pumps and motors
- poorly coordinated operating schedules.
Why Can a Short Demand Spike Matter?
Demand tariffs are specifically designed around peak power requirements.
Depending on the tariff, the highest measured demand during a defined period can influence the demand component of the bill.
This means a brief spike can sometimes have a financial effect beyond the short period in which it occurred.
However, the exact impact depends entirely on the applicable tariff.
A single spike does not automatically determine an entire month's bill for every business.
Instead, businesses should identify:
- how their tariff measures demand
- which time periods matter
- what measurement interval is used
- whether seasonal conditions apply
- whether kW or kVA is used.
How Can a Business Identify Its Peak Demand?
The first step is understanding the site's energy data.
Australian Government guidance for large energy users emphasises that understanding the business's demand profile is important for managing energy costs effectively.
Depending on the site and metering arrangement, useful information may include:
- interval electricity data
- electricity bills
- demand charges shown on bills
- maximum-demand data
- equipment operating schedules
- building-management data
- solar generation data
- battery data.
Looking at electricity consumption only at monthly level can hide the events that create demand peaks.
More detailed interval data can help show when demand rises and allow the business to compare those times with operational activity.
How Can Businesses Reduce Peak Demand?
Reducing peak demand does not necessarily mean simply using less electricity.
The objective is often to avoid unnecessary concentration of large electrical loads at the same time.
Understand the Demand Profile
Identify when the site's highest demand occurs.
Compare those periods with:
- production
- HVAC operation
- refrigeration
- pumps
- EV charging
- other large loads.
Without understanding when peaks occur, it is difficult to know which actions are likely to matter.
Stagger Large Electrical Loads
Where operations allow, avoid starting multiple high-powered systems simultaneously.
For example, equipment startup times may sometimes be staggered rather than having every major load activate at once.
Operational requirements and safety must always take priority.
Review Equipment Scheduling
Some flexible electrical loads may be able to operate outside the periods that contribute most heavily to demand.
Examples can include:
- EV charging
- water heating
- some pumping
- selected production processes
- battery charging.
Whether shifting these loads helps depends on the site's tariff and operational requirements.
Improve Energy Efficiency
Efficient equipment can reduce electricity consumption and may also reduce demand where it lowers the power required by major systems.
However, reducing kWh does not automatically guarantee lower peak kW.
Efficiency projects should therefore be evaluated against both energy consumption and demand.
Consider Solar Generation
Commercial solar can reduce the amount of electricity imported from the grid while the solar system is generating.
If a site's peak demand occurs during periods of strong solar generation, solar may also reduce grid demand at that time.
However, solar does not automatically eliminate demand charges.
If the site's highest demand occurs:
- early in the morning
- late in the afternoon
- at night
- during poor solar conditions
then solar generation may have limited impact on that particular peak.
Consider Battery Energy Storage
A commercial battery can potentially discharge during periods of high site demand.
This can reduce the amount of power being drawn from the grid during those periods.
This strategy is commonly associated with peak shaving.
Whether it makes financial sense depends on:
- the site's load profile
- battery size
- battery power rating
- tariff structure
- timing and frequency of demand peaks
- solar generation
- other battery objectives.
What Is Peak Shaving?
Peak shaving is the practice of reducing a site's maximum grid demand during high-load periods.
Instead of allowing all required power to come from the grid, a business may:
- reduce flexible loads
- shift loads to another time
- use onsite solar
- discharge a battery
- combine several strategies.
For example, if a business suddenly requires substantial power while its solar system is generating and a battery is available, those onsite energy resources may help reduce the amount of power that must be imported from the grid.
The effectiveness of peak shaving depends on knowing when peaks occur and controlling energy resources accordingly.
Can Commercial Solar Reduce Demand Charges?
Potentially.
Commercial solar primarily reduces grid electricity consumption during daylight hours.
Its effect on demand charges depends on whether solar generation overlaps with the site's relevant peak-demand periods.
For a business whose peak occurs during sunny daytime operating hours, solar may reduce the grid demand recorded during some of those periods.
For a business whose peak occurs after solar generation has fallen, the effect may be smaller.
Solar performance also varies with:
- weather
- season
- system size
- orientation
- shading
- operating profile.
Therefore, demand-charge reduction should not be assumed solely because a commercial solar system is installed.
Can Batteries Reduce Demand Charges?
Potentially.
Battery storage provides a business with greater control over when stored electricity is used.
If configured appropriately, a battery may discharge when site demand rises, reducing grid demand.
This is one application of battery peak shaving.
A battery may also be used for other objectives, depending on system design, including:
- increasing use of onsite solar
- shifting energy between time periods
- backup or resilience functions where supported by the system
- broader energy-management strategies.
However, battery economics should be assessed against actual site data.
A battery that is not appropriately sized or controlled for the site's demand profile may not deliver the intended demand-management outcome.
Solar + Battery for Demand Management
Solar and batteries can perform different roles.
| Technology | Primary Role | Potential Demand Benefit |
|---|---|---|
| Commercial solar | Generates electricity during daylight | Can reduce grid demand when generation overlaps with site peaks |
| Battery storage | Stores and dispatches electricity | Can discharge during selected demand peaks |
| Energy management | Coordinates loads and energy assets | Can help manage when and how electricity is consumed |
| Operational load shifting | Changes when flexible loads operate | Can reduce simultaneous electrical demand |
The best strategy depends on the site's actual energy profile.
For some businesses, operational changes may be the first opportunity.
For others, solar, batteries or an integrated commercial energy solutions approach may play a larger role.
Demand Charge Reduction Checklist
Before making major energy investments, a business should understand:
- What electricity tariff are we currently on?
- Does it include a demand charge?
- Is demand measured in kW or kVA?
- When is demand measured?
- What was our maximum demand over the last 12 months?
- What equipment was operating during our highest-demand periods?
- Are those loads flexible?
- Can major loads be staggered?
- Does our peak occur during solar-generation hours?
- Could battery storage address the timing of our peaks?
- Are there other operational or efficiency opportunities?
- Should our tariff or energy contract also be reviewed?
The objective is to base decisions on measured energy behaviour rather than assumptions.
The Bottom Line
Demand charges can make business electricity bills more complex because they are influenced not only by how much electricity is consumed, but also by how intensely electricity is used at particular times.
The key distinction is:
A business with high simultaneous electrical loads can therefore experience significant peak demand even when its overall monthly electricity consumption appears reasonable.
Managing demand begins with understanding the site's tariff and load profile.
From there, potential strategies may include:
- operational scheduling
- staggering equipment
- energy efficiency
- commercial solar
- battery storage
- peak shaving
- integrated energy management.
The appropriate solution depends on the business, its operations, its electricity tariff and when its demand peaks occur.