EE2004 Electrical Energy Systems Fundamentals

Chapter 5 Tariffs
 UK Electricity Industry

Transmission -
Generation 400 & 275 kV &
132kV

Distribution - 132kV & lower

Demand

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 UK Electricity Industry （Cont.）

Competitive Monopoly
Generation Transmission networks
On Shore/Off Shore
Transmission
Owners (TO)

Distribution
Network
Operators (DNO)
Supply Distribution networks
Energy Companies

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 UK Electricity Industry （Cont.）
Generation & Supply: Transmission & Distribution:

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1. What is a Tariff ? (1/3)

• The tariff is the rate at which the electric energy consumption is charged by the
supply company.
• The setting of charges for the supply of electric energy to consumers (i.e. tariff)
becomes one of the most important aspects of electricity economics as both the
generation and supply markets are getting more and more open nowadays.
• In most countries, many alternative tariffs are offered and the consumer can
decide which of the tariffs will be cheaper.
• For example, in certain tariffs the supply company charges are based on
maximum demand (kW or kVA) of the consumer (alone or in addition to energy
consumption).
• The reason for having a differential tariff structure is that electrical energy is not
a uniform product. The cost of supplying 1 kW load at 2 a.m. is different from
that at 4 p.m. on a hot summer day.

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1. What is a Tariff ? (2/3)

• In general, the cost of supply varies with :

1. voltage level
2. load and power factor
3. generation cost : hydro < nuclear < thermal
4. installation cost : thermal < hydro < nuclear
5. regional resources and government policies

• For example, during off-peak night hours when the most efficient base-load
thermal plants are operating, the cost of energy will be cheaper than that of
during peak hours in the evening when even the most inefficient plant may have
to be put into operation to meet all the demand.

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1. What is a Tariff ? (3/3)

• Briefly two types of charge will be required, namely:

1. A capacity or standing charge ($/kW) to pay for the installed equipment

required to produce electrical energy and to deliver it to the customers.
This charge is dependent on the installed capacity assets of the utilities.

2. An energy charge ($/kWh) to reflect the costs of the primary energy input
(coal, oil, gas, hydro, etc.) and the cost of converting it to electrical energy,
plus the losses incurred in delivering it to the customer.

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2. Loads (1/3)

• The major consumption groups are industrial, residential and commercial.

• Industrial consumption accounts for up to 40 percent of the total and is
expected to continue to increase in many industrialised countries and a
significant item is the induction motor.

• Quantities used in measurement of loads are defined as follows:

Maximum load : The average load over the half hour of maximum output.
Load factor : The units of electricity exported by the generators in a given
period, divided by the product of the maximum load in this period and the
length of the period in hours. The load factor varies with the type of load.
Average load
i.e. load factor =
Maximum load

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2. Loads (2/3)

Load factor may be daily or annual depending upon the period on which the
average and the maximum demand is calculated.
Energy consumed during the day
Daily load factor =
Daily kW maximum load × 24
Energy consumed during the year
Annual load factor =
Annual kW maximum load × 365 × 24

Diversity factor : This is defined as the sum of individual maximum demands

of the consumers, divided by the maximum load on the system. This factor
measures the diversification of the load and is concerned with the installation
of sufficient generating and transmission plant.
Sum of maximum demand of individual consumers
Diversity factor =
Simultaneous maximum demand of the station

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2. Loads (3/3)

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3. Example – Per Unit Generation Cost (1/3)

Compare the overall cost per unit generated by coal, oil, gas, and nuclear power
stations given the following data:

Fuel type Capital cost ($/kW) Fuel cost(c/kWh) Efficiency

Coal 960 1.60 38
Oil 800 3.20 40
Gas 480 2.08 56
Nuclear 2400 0.32 30

Assume interest on capital and depreciation per annum is 8 percent and that all
have similar life time.
Solution
It is convenient to work on the basis of 1 kW output and over 1 year. The effect of
load factor can be explored by repeating the calculation over a range of load factors.

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3. Example – Per Unit Generation Cost (2/3)
The following show how per unit cost can be calculated using a 40% load factor
and coal-fired generation data.
Capital cost on an annual basis for each kW installed

= capital cost × depreciation =

Energy generated per kW per annum

= load factor × hours = kWh
Cost of 3504 kWh is given by

Total cost per annum to produce 3504 kWh

= capital cost + generating cost = 76.8 + 147.54 = $224.34
.
Hence, cost per unit generated is or 6.4 cent per unit

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3. Example – Per Unit Generation Cost (3/3)
The following table is compiled for load factor varied from 40% to 80%.

Load factor 0.4 0.5 0.6 0.7 0.8

Coal 6.4 5.97 5.66 5.46 5.31
Oil 9.8 9.46 9.22 9.04 8.91
Gas 4.8 4.59 4.45 4.34 4.26
Nuclear 6.5 5.46 4.72 4.19 3.81

It should be noted from the above table how nuclear generation is heavily
dependent upon having a high load factor to be able to compete with gas (using
CCGT) and coal. With the prices quoted, gas is cheaper than coal at any load
factor, hence emphasising the importance of keeping coal costs down through
long-term contracts.

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4. Tariff Framing Objectives

a) The total annual revenue covers the total cost of generation, distribution and
transmission.
b) As far as practicable, each class or consumer meets the total cost of supplying
that particular class.
c) The use of electricity is encouraged in such a manner that the economy of the
undertaking is improved.
d) The tariff must be readily understood by the consumers.
e) The tariff must be reasonably equitable between different consumers.
f) The tariff should also be such as to encourage consumers to improve their load
factor or to transfer their demand from peak to off-peak periods.

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5. Costs
It can be justifiably claimed that satisfactory tariffs cannot be framed unless they are
properly related to the cost of supply.

5.1 Total Costs

Total costs are simply the aggregate of all costs incurred by the electricity boards in
generating, transmitting and distributing electrical energy throughout the year.
These would include all operating expenses, including depreciation, duties/taxes
and interest on loans plus an allowance for return on investment.

5.1.1 Average Cost

Average cost to the utility per kWh output for the year would be obtained by
dividing the total cost by the total number of kWh produced during the year.

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5.1.2 Fixed and Variable Costs
• Fixed costs are costs that do not vary and consist of consumer related costs
and capacity related costs.
• Consumer related costs are costs such as those of meter reading, billing,
collection, providing service mains, etc.
• Capacity related costs are made up of annual interest and depreciation on
capital costs of the board’s assets used in the generation and distribution of
energy.
• The cost of administration, salaries, wages and other expenses that do not vary
directly with the output and number of consumers are also included in these costs.
• Variable costs are those that vary with output such as fuel cost which varies with
increase generation.
• Variable costs are also known as energy related costs or running costs.

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5.1.3 Costs Marginal/incremental Costs
• Marginal cost is the additional cost that is incurred in generating one more unit
(1 kW or 1 kWh) or the cost that is saved if one unit less is generated.
• Incremental cost measures the added costs of producing an increment of
output.

5.1.4 Depreciation
Depreciation cost of fixed assets which may last for 15 to 40 years.

5.2 Costing Methods

There are two main methods of approach to the problem of tariffs based on costs.
1. Based on allocated costs, i.e. costs allocated to classes or consumers in a fair,
reasonable and stable manner.
2. Based on production costs which depends on when and where the consumer
requires power.

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6. Tariff Structure
• Power companies are usually monopolies, therefore, rates (i.e. tariffs) are
subject to government regulations.
• The determination of the revenue requirement is a matter of regulatory
commission decision and the general formula is as following:
Revenue Requirement = Operating Costs + Depreciation Costs +Tax
+Rate Base or Net Evaluation × Rate of Return
• The common tariff types are given below.
6.1 Flat Rate Tariff
In this tariff the charge per unit is fixed irrespective of the maximum demand or the
energy consumption.

Total annual charge of the power station

Charge per kWh =
Total number of units supplied to consumers

The tariff is generally applicable to domestic and other small loads.

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6.2 Two Part Tariff

The total charges under this tariff have two components :

1. Fixed charge proportional to the kW or kVA maximum demand

Charge per unit (kVA or kW) of maximum demand
Total annual fixed charges
=
Sum of maximum (kVA or kW) demand of consumer
2. Running charge proportional to the energy consumption
Charge per unit (kWh)
Total annual running charges
=
kW maximum demand × Load factor × 365 × 24
This tariff is generally suitable for industrial consumers and has the disadvantage
that the consumer has to pay his fixed charge irrespective of energy consumed or
not.

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6.3 Block Tariff

Tariff in which the price is based on a series of rates per kWh applying to successive
blocks of kWh’s. Each block is of fixed size, though the size is not necessarily the
same for each block.

6.4 Restricted Hours Tariff

Tariff applicable to supply which can only be used during certain specific hours.

6.5 Off-Peak Tariff

Restricted hours tariff in which a lower price is charged for electricity used during
prescribed off-peak hours.

6.6 Controlled Load Tariff

Tariff applicable to loads, supply to which may be interrupted by the discretion of the
supplier, in order to regulate the peak loads.

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6.7 Power Factor Tariff
Power factor as near unity as practicable lowers the cost of energy supply. To
ensure that power factor of a consumer load is not below a certain minimum, say
0.85, the tariff provides for extra charge if power factor is less.

6.8 Bulk Supply Tariff

Tariff chargeable from large consumers of general or mixed loads, such as railways,
hospitals, etc. where further distribution of load is to be done by the consumer.

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7. Load Management

• Because electricity cannot be stored and in order to produce and use it more
efficiently it is important to improve the overall load factor of the system and so
optimise generating station production.

• Improved loading on the system results in more efficient use of existing plant,
and reduces the need for new plant.

• Tariffs, pumped storage and the use of seasonal or daily diversity between
interconnected systems are some of the methods mentioned before which can
modify the shape of the load curve to produce economy of operation.
• A more direct method would be the control of the load either through tariff
structure or direct electrical control of appliances in the form of remote on/off
control of, for instance, consumer’s electric water-heaters.

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8. Example – Tariff (1/2)

The monthly readings of a consumer’s meters are as follows:

Maximum demand 60 kW
Energy consumed 24,000 kWh

With the following two monthly rates of supply being offered:

1. $50 per KW of maximum demand plus $0.3 per KWh

2. A flat rate of $0.4 per KWh

Determine the annual load factor of the load and the total cost of energy
consumption per annum based on tariffs (1) and (2).
Which tariff is more favourable ?

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8. Example – Tariff (2/2)

Solution

total kWh generated per annum

Annual load factor = × 100%
maximum demand in kW × 8760hr

24000 × 12
= × 100% = 54.79%
60 × 8760

Annual cost on tariff (1) = (60 × 50 + 0.3 × 24, 000) × 12 = $122,400

Annual cost on tariff (2) = 0.4 × 24, 000 × 12 = $115, 200

Tariff (2) is more favourable.

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Thank you

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