Electricity Tariffs

Definition: The amount of money frame by the supplier for the supply of electrical energy to
various types of consumers in known as an electricity tariff. In other words, the tariff is the
methods of charging a consumer for consuming electrical energy. The tariff covers the total
cost of producing and supplying electric energy plus a reasonable cost.

where, C – total charge for a certain period (say one month)

x – maximum demand during the period (kW or kVA)
y – Total energy consumed during te period (kW or kVA)
A – cost per kW or kVa of maximum demand.
B – cost per kWh of energy consumed.
D – fixed charge during each billing period.

Thus, the total bill of the consumer has three parts, namely, fixed charge D, semi-
fixed charge Ax and running charge By. This is known as three-part electricity tariff,
and it is mainly applied to the big consumer.

Factors Affecting the Electricity Tariffs

The following factors are taken into accounts to decide the electricity tariff:

 Types of Load – The load is mainly classified into three types, i.e., domestic,
commercial, or industrial. The industrial consumers use more energy for a longer
time than domestic consumers, and hence the tariff for the industrial consumers
is more than the domestic consumers. The tariff of the electric energy varies
according to their requirement.
 Maximum demand – The cost of the electrical energy supplied by a
generating station depends on the installed capacity of the plant and kWh
generated. Increased in maximum capacity increased the installed capacity of the
generating station.
 The time at which load is required – The time at which the maximum load
required is also important for the electricity tariff. If the maximum demand
coincides with the maximum demand of the consumer, then the additional plant
is required. And if the maximum demand of the consumers occurs during off-peak
hours, the load factor is improved, and no extra plant capacity is needed. Thus,
the overall cost per kWh generated is reduced.
 The power factor of the load – The power factor plays an important role in
the plant economics. The low power factor increases the load current which
increases the losses in the system. Thus, the regulation becomes poor. For
improving the power factor the power factor correction equipment is installed at
the generating station. Thus, the cost of the generation increases.
 The amount of energy used – The cost of electrical energy is reduced by
using large amounts of energy for longer periods.

Types of Electricity Tariff

 Some of the most important types of tariff are as follows;

1. Flat Demand Rate tariff

2. Straight-line Meter rate tariff
3. Block meter Rate tariff
4. Two-part tariff
5. Power factor tariff
6. Seasonal rate tariff
7. Peak load tariff
8. Three-part tariff

The different types of tariffs are explained below in details

1. Flat demand rate tariff – The flat demand rate tariff is expressed in the form, C
= Ax Here the bill depends only on the maximum demand. It is independent of the
energy consumed. This system is used in street lighting, sign lighting, signal system,
and irrigation tube wells. In all such systems, the amount of connected load and
hours of their use is unknown, and the rate of charge is made accordingly. Thus,
metering is not required in this system of the tariff.

2. Straight-line meter rate tariff – This type of tariff is given by the relationship C
= By. In this system, the bill depends only upon the amount of energy consume.
The different types of consumers are charged at different rates.

The rate for each type of consumption is decided by taking into consideration the
load factor and diversity factors of the load. For examples, the rate for light load and
fan load is higher than that for power load. For this purpose, separate energy meters
are to be installed for light and power load.

3. Block meter rate tariff – In this system, the energy consumption is

distinguished into blocks, and the per unit price is fixed in each block. The price per
unit in the first block is the highest, and it decreases for the succeeding blocks.

The price and the energy consumption are

divided into three blocks. The first few units of energy at a certain rate, the next at a
slightly lower rate and the remaining unit at a still lower rate.
4. Two-part tariff – In two-part tariff, the total charge from the consumer is
divided into two components. The first component is the fixed charge which depends
upon the maximum demand. The second component is the running charge which
depends upon the energy consumed.

The factor A and B may be constant and vary according to some sliding.

5. Power factor tariff – The tariff in which the power factor of the consumer load
is taken into consideration is called power factor tariff. The power factor tariff is
mainly classified into two types.

a. kVA maximum demand tariff – This is also a two-part tariff.

In this system, the consumer is compelled to

improve the power factor of his load since low power factor will increase the KVA.

b. kWh and kVarh tariff –

Since kVArh decreases with the increases in power factor. This type of tariff will
induce the consumer to improve the power factor.

c. Sliding Scale or Average power factor tariff – In such type of tariff the
average power factor, say 0.8 lagging may be taken as the reference. If the power
factor of the consumer is below this reference value, a suitable additional charge is
realised from the consumer for each step. Similarly, if the power factor is above the
reference value, the suitable discount is allowed to the consumer for each step rise.

6. Seasonal rate tariff – This tariff specifies a higher price per kWh used during
the season of the year in which the system peak occurs. This is known as the on-
peak season. The price per kWh unit is lower during the season of the year in which
the usage is low. This is known as the off-peak season.

7. Peak-load tariff – This peak load tariff is similar to the seasonal rate tariff. It
specifies higher prices per kWh used during the peak period of the day and lower
prices during the off-peak period of the day.

The seasonal rate and peak load tariff both are designed to reduce the system peak
load and hence reduce the system idle standby capacity.

8. Three-part tariff – The three-part tariff is in the form of  and it

is applied to the big consumer.
 Reference 2

Simple Tariff:

Definition: When there is a fixed rate per unit of energy

consumed, it is known as simple tariff (Uniform Rate Tariff).
 This is the most simplest of all tariff.
 In this type, the price charged per unit is constant.
 It means, the price will not vary with increase or decrease in
number of units used.
Disadvantages:
 The cost per unit delivered is high.
 There is no discrimination among various types of
consumers.

Flat Rate Tariff:

Definition: When different types of consumers are charged at

different uniform per unit rates, it is said to be Flat rate Tariff.
 In this type, the consumers are grouped into different
classes.
 Each class is charged at different uniform rate.
 the different classes of consumers may be taken into
account of their diversity and load factors.
 Since this type of tariff varies according to the way of supply
used, separate meters are required for lighting load, power
load etc.

Block rate tariff:

When a given block of energy is charged at a specified rate and

the succeeding blocks of energy are charged at progressively
reduced rates is called as block rate tariff.
 In this type, the energy consumption is divided into many
blocks and price per unit is fixed in each block.

Two Part tariff:

When the rate of electrical energy is charged on the basis of

maximum demand of the consumer and the units consumed it is
called two-part tariff.
 In this type, the total charge to be made from the consumer
is split into two components.
 ie, fixed charges and running charges.
 The fixed charges depend upon the number of units
consumed by the customer. Thus the consumer is charged at a
certain amount per kW of maximum demand + a certain
amount per kWh of energy consumed.
 Total charges = Rs (X x kW + Y x kWh)
 It is easily understood by the consumer.
 It recovers fixed charges which depend upon the maximum
demand of the consumer independent of the units consumed.
Disadvantages
 Consumer has to pay the fixed charges irrespective of the
fact whether he has consumed or not the electrical energy.
 There is always error in assessing the maximum demand of
the consumer.

Maximum demand tariff:

It is similar to two-part tariff. The only difference is the maximum

demand of the consumer is calculated by installing a maximum
demand meter at his premises. This type of tariff is mostly applied
to the bulk consumers.

Power factor tariff:

The tariff in which the power factor of the consumers is taken into
account is known as power factor tariff.

Three part Tariff:

When the total charges to be made from the consumer is split

into three parts, fixed charge, semifixed charge and running
charge, it is known as three-part tariff. This type of tariff is applied
to big consumers. The principle objection of this type of tariff is
the charges are split into three components ( fixed charge, charge
per kW of maximum demand, charge per kWh of energy
consumed)

Reference 3

Various Types Of Electricity Tariff

1. Simple Tariff
In this type of tariff, a fixed rate is applied for each unit of the energy consumed. It is also
known as a uniform tariff. The rate per unit of energy does not depend upon the
quantity of energy used by a consumer. The price per unit (1 kWh) of energy is
constant. This energy consumed by the consumer is recorded by the energy meters.
Graphically, it can be represented as follows:

Advantages:

 Simplest method
 Easily understandable and easy to apply
 Each consumer has to pay according to his utilization
Disadvantages 

 There is no discrimination according to the different types of consumers.

 The cost per unit is high.
 There are no incentives (an attractive feature that makes the consumers use
more electricity.)
 If a consumer does not consume any energy in a particular month, the supplier
cannot charge any money even though the connection provided to the consumer
has its own costs.
Application 

 Generally applied to tube wells used for irrigation purposes.

2. Flat Rate Tariff

In this tariff, different types of consumers are charged at different rates of cost per unit
(1kWh) of electrical energy consumed. Different consumers are grouped under different
categories. Then, each category is charged money at a fixed rate similar to Simple Tariff.
The different rates are decided according to the consumers, their loads and load factors.
Graphically, it can be represented as follows:
Advantages

 More fair to different consumers.

 Simple calculations.
Disadvantages 

 A particular consumer is charged at a particular rate. But there are no incentives

for the consumer.
 Since different rates are decided according to different loads, separate meters
need to be installed for different loads such as light loads, power loads, etc. This
makes the whole arrangement complicated and expensive.
 All the consumers in a particular “category” are charged at the same rates.
However, it is fairer if the consumers that utilize more energy be charged at lower
fixed rates.
Application 

 Generally applied to domestic consumers.

3. Block Rate Tariff

In this tariff, the first block of the energy consumed (consisting of a fixed number of units)
is charged at a given rate and the succeeding blocks of energy (each with a
predetermined number of units) are charged at progressively reduced rates. The rate per
unit in each block is fixed.
For example, the first 50 units (1st block) may be charged at 3 rupees per unit; the next
30 units (2nd block) at 2.50 rupees per unit and the next 30 units (3rd block) at 2 rupees
per unit.
Graphically, it can be represented as follows:
Advantages

 Only 1 energy meter is required.

 Incentives are provided for the consumers due to reduced rates. Hence
consumers use more energy. This improves load factor and reduces cost of
generation.
Disadvantages 

 If a consumer does not consume any energy in a particular month, the supplier
does not charge any money even though the connection provided to the consumer
has its own costs.
Application 

 Generally applied to residential and small commercial consumers.

4. Two Part Tariff

In this tariff scheme, the total costs charged to the consumers consist of two
components: fixed charges and running charges. It can be expressed as:
Total Cost = [A (kW) + B (kWh)] Rs.
Where, A = charge per kW of max demand (i.e. A is a constant which when multiplied
with max demand (kW) gives the total fixed costs.)
             B = charge per kWh of energy consumed (i.e. B is a constant which when
multiplied with units consumed (kWh), gives total running charges.)
The fixed charges will depend upon maximum demand of the consumer and the running
charge will depend upon the energy (units) consumed. The fixed charges are due to the
interest and depreciation on the capital cost of building and equipment, taxes and a part
of operating cost which is independent of energy generated. On the other hand, the
running charges are due to the operating cost which varies with variation in generated
(or supplied) energy.
Advantages

 If a consumer does not consume any energy in a particular month, the supplier
will get the return equal to the fixed charges.
Disadvantages 

 Even if a consumer does not use any electricity, he has to pay the fixed charges
regularly.
 The maximum demand of the consumer is not determined. Hence, there is error
of assessment of max demand and hence conflict between the supplier and the
consumer.
Application 

 Generally applied to industrial consumers with appreciable max demand.

5. Maximum Demand Tariff

In this tariff, the energy consumed is charged on the basis of maximum demand. The
units (energy) consumed by him is called maximum demand. The max demand is
calculated by a maximum demand meter. This removes any conflict between the
supplier and the consumer as it were the two part tariff. It is similar to two-part tariff.

Application

 Generally applied to large industrial consumers.

6. Power Factor Tariff

In this tariff scheme, the power factor of the consumer’s load is also considered. We
know that power factor is an important parameter in power system. For optimal
operation, the pf must be high. Low pf will cause more losses and imbalance on the
system. Hence the consumers which have low pf loads will be charged more. It can be
further divided into the following types:

(I) KVA Maximum Demand Tariff

In this type of tariff, the fixed charges are made on the basis of maximum demand in
kVA instead of KW.
We know that power factor = kW / kVA
Hence, the pf is inversely proportional to kVA demand. Hence, a consumer having low
power factor load will have to pay more fixed charges. This gives the incentive to the
consumers to operate their load at high power factor. Generally, the suppliers ask the
consumers to install power factor correction equipment.

(II) KW And KVAR Tariff

In this tariff scheme, the active power (kW) consumption and the reactive power (kVAR)
consumption is measured separately. Of course, a consumer having low power factor
load will have to pay more fixed charges.

(III) Sliding Scale Tariff

In this type of tariff scheme, an average power factor (generally 0.8 lagging) is taken as
reference. Now, if the power factor of the consumer’s loads is lower than the reference,
he is penalized accordingly. Hence, a consumer having low power factor load will have
to pay more fixed charges. Also, if the pf of the consumer’s load is greater than the
reference, he is awarded with a discount. This gives incentives to the consumers. It is
usually applied to large industrial consumers.

7. Three Part Tariff

In this scheme, the total costs are divided into 3 sections: Fixed costs, semi-fixed costs
and running costs.
Total Charges = [A + B (kW) + C (kWh)]
Where, A = fixed charges,
             B = charge per kW of max demand (i.e. B is a constant which when multiplied
with max demand (kW) gives the total fixed costs.)
             C = charge per kWh of energy consumed (i.e. C is a constant which when
multiplied with units consumed (kWh), gives total running charges.)