Demand charges in commercial electricity contracts are charges based on the highest amount of power your site draws from the grid over a short interval, usually a 15 or 30 minute period, during the billing month. In practice this means you can have a relatively modest monthly energy total (kWh) but still pay a high bill if you create a short, sharp peak.
This matters most for businesses with equipment that starts together or cycles, for example HVAC, refrigeration compressors, large motors, electric ovens, welders, pumps, or EV fleet charging.
Demand charges vs energy charges: The simple difference
Most commercial electricity bills combine several components, but two often cause confusion:
- Energy (usage) charges: based on how much electricity you use over time, measured in kilowatt-hours (kWh).
- Demand charges: based on your highest rate of electricity use at any moment, measured as kilowatts (kW) or kilovolt-amperes (kVA).
Think of energy charges as how many kilometres you travelled, demand charges are the top speed you hit on the trip.
Why demand charges exist in Australia
Demand charges are usually driven by network tariffs (distribution and sometimes transmission pricing). Networks must build and maintain infrastructure to meet peak load, not just total consumption. When a business spikes demand, the network needs capacity available, even if that spike only occurs briefly.
Retailers often pass these network demand components through to commercial customers via the contract, either as a separate demand line item, or embedded into the tariff structure.
How demand is measured on a commercial meter
If your site has an interval (smart) meter, the meter records average demand in intervals, commonly:
- 15 minute intervals in many networks and states
- 30 minute intervals in some networks and legacy tariff setups
Your peak demand for the billing period is usually the highest interval average recorded within the billing month, or within a defined daily time window if your tariff has a demand window.
kW demand vs kVA demand: What is the difference?
Commercial demand can be billed as either kW demand or kVA demand, depending on your network tariff and retailer offer.
- kW (kilowatts) measures real (active) power doing useful work.
- kVA (kilovolt-amperes) measures apparent power, which includes reactive power. This is why kVA demand can be higher than kW demand for sites with a poor power factor.
Quick rule of thumb using power factor
The relationship is often simplified as:
kVA ≈ kW ÷ power factor
If your power factor is 0.85 and your peak load is 100 kW, then:
- kVA demand ≈ 100 ÷ 0.85 = 117.6 kVA
That difference matters if you are billed on a kVA demand or kVA demand tariff.
What is a peak demand tariff?
A peak demand tariff is a tariff structure where the demand charge is calculated from your maximum interval demand, often during nominated peak periods. Common variations include:
- Anytime demand: peak interval can occur at any time of day.
- Time window demand: only intervals within a defined window count, for example weekday afternoons and evenings.
- Seasonal demand: higher charges (or different windows) in summer or winter, depending on the network.
Exact windows, seasons, and definitions vary by distribution network and tariff assignment. This is why bill and tariff review is critical before changing retailers.
How demand charges are calculated (with numeric examples)
Demand charges are usually shown as $ per kW per month or $ per kVA per month. The bill then multiplies that rate by your measured peak demand.
Example 1: Basic kW demand charge
Assume your contract includes:
- Energy rate: 28 c/kWh
- Demand charge: $18 per kW per month
- Billing month peak demand: 65 kW (highest 15 minute interval)
- Total monthly energy: 18,000 kWh
Calculate charges:
- Energy charge = 18,000 kWh × $0.28 = $5,040
- Demand charge = 65 kW × $18 = $1,170
In this case demand charges add about 23% on top of the energy usage component, before daily supply, metering and other charges.
Example 2: Short spike problem (same kWh, very different bill)
Two similar sites each use 18,000 kWh in a month. The only difference is their peak interval demand:
- Site A peak demand: 45 kW
- Site B peak demand: 80 kW (for example, multiple motors and HVAC start at once)
- Demand charge: $18 per kW per month
Demand charges:
- Site A: 45 × $18 = $810
- Site B: 80 × $18 = $1,440
Even with identical kWh, Site B pays $630 more that month from demand charges alone.
Example 3: kVA demand and power factor impact
Assume a site is billed on kVA demand at $14 per kVA per month. In the peak interval the site draws 90 kW and power factor averages 0.80.
- kVA ≈ 90 ÷ 0.80 = 112.5 kVA
- Demand charge = 112.5 × $14 = $1,575 for the month
If the same site improves power factor to 0.95 (often via power factor correction equipment, where appropriate), then:
- kVA ≈ 90 ÷ 0.95 = 94.7 kVA
- Demand charge = 94.7 × $14 = $1,326
That is a reduction of about $249 per month, assuming the same kW peak.
Common contract and tariff details to check
Before you compare offers, confirm how demand is defined for your site. Look at your bill and contract schedule for:
- Unit: kW demand or kVA demand
- Interval length: 15 minutes or 30 minutes
- Demand window: anytime vs peak hours only
- How many peaks count: highest interval only vs average of top N intervals
- Ratchet clauses: in some network tariffs, a past peak can influence charges for future months
These details are a major reason businesses can switch retailers and still see limited savings if the underlying network tariff is not right for the load profile.
How to tell if demand charges are hurting your business
Practical indicators include:
- Demand line item is a large portion of the bill, especially in months where kWh looks normal
- Usage is spiky, for example equipment start-ups in the morning, batch processes, defrost cycles, or simultaneous kitchen and HVAC loads
- Seasonal peaks, especially summer cooling loads or winter heating loads
Many businesses only discover the impact when reviewing interval data or when a single operational change triggers a new monthly peak.
How to reduce demand charges (Practical actions)
Reducing demand charges generally means reducing the highest interval, not necessarily reducing overall kWh.
Stagger large equipment start times
Start-up demand can be high for motors, compressors and HVAC. Simple sequencing can reduce the single highest interval.
Adjust HVAC controls and pre-conditioning
Pre-cooling or pre-heating outside the demand window can flatten peaks, depending on your tariff time window.
Review power factor if you are on a kVA demand tariff
If your network bills on kVA demand, power factor correction may reduce apparent power and therefore the billed kVA demand. Suitability depends on your equipment and site electrical characteristics.
Manage EV fleet charging
Uncontrolled charging can create new peaks. Smart charging schedules and load management can keep demand below a target threshold.
Battery storage or peak shaving controls (For some sites)
For sites with consistently high demand charges, batteries or control systems may be viable to shave peaks, particularly where demand windows align with predictable peaks.
Do a network tariff review
Many demand outcomes are driven by network tariff assignment. A tariff that suited an older operating pattern may no longer fit after equipment changes, extended trading hours, or adding solar and batteries.
Are demand charges always bad?
Not necessarily. A demand-based tariff can be cost-effective for businesses that have:
- Steady load with low peaks relative to kWh
- Ability to control peak times and ramp loads smoothly
- Operational flexibility to avoid demand windows
The key is matching the tariff to your actual load profile, then negotiating a contract that prices that profile competitively.
Where demand charges show up on an Australian business electricity bill
On many bills you will see a line similar to:
- Demand charge, $/kW or $/kVA
- Measured demand (kW or kVA)
- Charge amount
Depending on retailer format, demand may appear under network charges or under your tariff component summary.
How Zembl helps businesses reduce demand costs
If demand is driving your bills, the best next step is a bill and tariff review that includes your interval data where available. Zembl helps by:
- Checking your current tariff and whether demand is billed in kW or kVA
- Identifying peak drivers in your load profile and the times they occur
- Comparing retailer offers from our panel against your real usage
- Coordinating switching paperwork and ongoing support
Next steps
If you are unsure whether you are on a demand tariff, or you suspect a peak demand tariff is inflating costs, send Zembl a recent bill. We can explain your demand exposure in plain language and compare options based on your actual usage.
Related Zembl resources:
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