How do electricity tariffs work?

How do electricity tariffs work?

Electricity tariffs are typically made up of three main components, each of which can be broken down into sub-categories. In general electricity tariffs are published by supply authorities and various different tariff structures can be used to try and encourage certain types of behaviours.

Consumption charges

A key part of almost every tariff structure is a measure of the amount of energy that is used on site. This is typically measure in kilowatt-hour (kWh) which is the same as one “unit” of energy use at home.

The portion of the bill that is made up of these costs usually varies from 50%-100%.

This can be billed in several ways:

  1. A flat rate per unit of energy used
  2. A flat rate per unit of energy used, that changes seasonally
  3. A rate that changes based on when you use the energy during the day (for example, higher costs during peak hours, lower costs during off-peak hours) – this is called Time-of-use
  4. A stepped tariff, where the first block of energy usage has a certain cost, the next a different cost and so forth
  5. Surcharges added to the bill such as taxes and levies

Any tariff may be made up of a combination of the above structures, such as a combination of a seasonal and Time-of-use rate which is seen reasonably often. Your power factor does not affect these charges

Maximum Demand Charges

As sites become larger, the use of a maximum demand charge becomes more frequent. The charge is based on the Demand which is measured in kVA. The reason this is billed is that the supply authority should be ready to supply this load at any time.

This is calculated in one of the following ways:

  1. The maximum kVA demand pulled in a billing period (this is typically over a small time period such as 15-30 minutes)
  2. The maximum kVA demand pulled during a long period such as a year
  3. This is sometimes based on a minimum expected load

The maximum demand in kVA is affected by your power factor. It usually makes up 0-45% of the bill

Service Fees

These fees may take on a wide variety of forms such as:

  1. Flat rate per month or day
  2. Flat rate based on connection size
  3. Service fee based on notified maximum demand (i.e. a contracted demand that you agree not to exceed)
  4. Administrative charges

Service fees are usually very small when compared to the other charges but may be as high as 20% of some specific accounts.

Other charges

There are some charges that are less frequently present on bills but are still noteworthy:

  1. Reactive energy charge – this is a charge that accounts for bad power factor. It is based on the total reactive energy measured by the meter in kVARh
  2. Excess NMD charge – this is a penalty fee imposed by supply authorities when clients exceed the contracted notified maximum demand. The fee is typically based on the amount exceeded by and the frequency of these events
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