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Electricity Tariffs Explained | Residential and Industrial Tariff

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As is the case with many English words, the word “tariff” has more than one definition. A common definition is a tax imposed on imported goods. The second definition is the rate structure charged by a party for services or goods. This second definition is used by many utilities in reference to their published charges for electrical service.

Every utility will have a rate structure that it charges for its electrical service, but not every utility will necessarily identify that rate structure as a “tariff.” Some utilities use the term “rates” when referring to their schedule of charges.

Electricity Tariffs vary greatly around the world and often within a country. A large number of factors determine the cost of electricity in any particular region.

The two major expenses that determine the cost of a customer’s electricity are the cost of energy and the cost of capital.

Obviously, the cost of fuel is an expense to a utility. If a utility’s fuel costs rise, the utility must raise its fees to help pay for the greater expense.

Worldwide, the costs of both fossil and nuclear fuels have been steadily rising, and likewise, the costs of electricity have been trending upward.

Some sources of electrical energy as hydro, solar, and wind are free. There is no energy expense associated with these sources, but there is a capital expense that must be reimbursed. The cost of capital is the other large expense that every utility must address.

1 Residential Tariffs

Residential users of electricity have limited options available that may be taken to reduce the monthly billing for electricity.

Time of use (TOU) has become one option that has been offered to some residential customers. By reducing electrical usage during peak periods, a homeowner with a TOU option can save on the electrical bill.

Some utilities also offer cost-reducing programs whereby a homeowner can agree in advance to allow the periodic interruption, by the utility, of the operation of certain appliances during peak periods.

A small percentage of homeowners have taken the step of installing solar panels or wind turbines to offset the monthly electrical bill.

2 Commercial and Industrial Tariffs

Commercial and industrial customers who have a three-phase electrical service are charged for their service according to a tariff that is very different from the residential schedule.

Unlike residential customers, the customers of three-phase electricity are typically classified into one of the several possible electricity tariff categories. And within a particular classification of a tariff schedule, there will be a number of possible options available to users for reducing the monthly billing.

Some utilities have a large variety of electricity tariffs. Some California utilities have dozens of tariff schedules. Typical categories of tariffs offered by these utilities are

  • Residential
  • Residential TOU
  • Maximum demand of 1000 kW
  • Commercial A/C programs
  • Demand bidding programs

A three-phase customer would be well-advised to understand the possible options available. Often a few minor, and sometimes inexpensive, changes can be made to significantly reduce the cost of purchased electricity.

In most areas, the cost of a three-phase service in any electricity tariff category will have several components to it. The most common categories are

  • Energy (kWh)—peak
  • Energy (kWh)—off-peak
  • Demand (kW, current, or VA)
  • Power factor penalty

2.1 Energy Charges

Customers of a three-phase service very often can reduce the charge for energy (kWh) by one or more methods. With the more frequent appearance of the smart meters, the number of options is generally increasing. Shifting energy consumption to off-peak times is very often one of these options.

However, many three-phase customers find it impractical to shift electrical usage as other considerations dominate. Sometimes, savings can be found in other charges appearing on the monthly electrical bill.

2.2 Demand Charges

Many larger customers of a three-phase service are billed for electrical “demand.” The term “demand” may appear on the monthly billing although the charge may appear under a different title.

“Billing capacity” is one such term sometimes used in lieu of “demand.” Typically demand charges are a measure of the power (kW), current, or VA consumption integrated over a predetermined time period of time.

 The rates for demand vary greatly from one utility to another and are typically in the range of $0–$6/kW. For many years, demand was measured by an electromechanical demand meter that determined the demand charge for a billing period.

The demand meter had only one method of measuring demand regardless of the time of day or time of year. However, with the advent of the smart meters, some utilities are adjusting demand charges up or down depending on the time of day and time of year.

2.3 Miscellaneous Charges

A bill for three-phase electrical power may contain a listing of a number of miscellaneous charges, most of which are fixed by the utility and non-negotiable.

In addition to the common charges for energy, demand, and low power factor the following are separate listings sometimes found on electrical bills:

Meter charge—this is a charge for having an active electrical service to a facility.

Minimum billing—a minimum charge for an active electrical service.

Transmission charge—a charge for the transmission of electrical power.

Nuclear decommissioning—a fund set aside for the eventual decommissioning of a utility’s nuclear plant.

Customer charge—a charge to help pay for overhead expenses as mail, maintenance, line service, and reading meters.

Environmental charge—a fee to pay for equipment specifically mandated by regulators to protect the environment.

Fuel charge—a separate listing of fuel costs which often vary from 1 month to the next.

Taxes—remuneration for taxes a utility must pay.

3 Summary of Common Electricity Tariffs

A user of three-phase electrical power would generally be well-advised to have an experienced professional review the monthly electric bills to consider changes that might be made to reduce charges.

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About Ahmad Faizan

Mr. Ahmed Faizan Sheikh, M.Sc. (USA), Research Fellow (USA), a member of IEEE & CIGRE, is a Fulbright Alumnus and earned his Master’s Degree in Electrical and Power Engineering from Kansas State University, USA.