Introduction

The word tariff comes from the Italian word tariffa "list of prices, book of rates," which is derived from
the Arabic ta'rif "to notify or announce." A tariff may be either:
(a) A tax on imports or exports (called trade tariff), or
(b) A list or schedule of prices for such things as rail service, bus routes, and electrical usage (electrical
tariff, etc.).
The price of electrical energy, like the price of bread, corn, or petrol plays an important role in society and
has a great influence on the national economy.
Electricity pricing (sometimes referred to as electricity tariff or the price of electricity) varies widely from
country to country, and may vary significantly from locality to locality within a particular country. There
are many reasons that account for these differences in price. The price of power generation depends
largely on the type and market price of the fuel used, government subsidies, government and industry
regulation, and even local weather patterns.
Electricity prices vary all over the world, even within a single region or power-district of a single country.
In standard regulated monopoly markets, they typically vary for residential, business, and industrial
customers. For any single customer class, electricity prices might vary by time-of-day or by the capacity
or nature of the supply circuit (e.g., 5 kW, 12 kW, 18 kW, 24 kW are typical in some of the large
developed countries); for industrial customers, single-phase vs. 3-phase, etc. If a specific market allows
real-time dynamic pricing, a more recent option in only a few markets to date, prices can vary by a factor
of ten or so between times of low and high system-wide demand. The electricity rate is the unit cost per
unit electricity. The actual electricity rate that a customer pays can often be distorted by the effect of
customer charges, particularly for small consumers (e.g. residential).
The cost of electricity generated by different sources is a calculation of the cost of generating electricity
at the point of connection to a load or electricity grid. It includes the initial capital, return on investment,
as well as the costs of continuous operation, fuel, and maintenance. The cost is normally stated in units of
local currency per unit of electricity, for example cents-per-kilowatt-hour for small numbers, or dollarsper-megawatt-hour for larger quantities. The calculation does not include wider system costs associated
with each type of plant, such as long distance connections to grids, balancing and reserve costs, and does
not include externalities such as health damage by coal plants, decommissioning costs of nuclear plant.
These types of items can be explicitly added if necessary. It has little relation to actual price of power, and
is widely used to assist policy makers and others to guide discussions and decision-making.

Requirements on a Tariff
The main requirements on a tariff are:
1. A cost reflective pricing must be used to indicate to consumers the true cost of supplying their energy
needs so that demand and supply can be matched efficiently.

2. The tariff should satisfy fairness principles such that costs are allocated among customers according to
the burden they place on the energy system. Tariffs should ensure a reasonable degree of stability and
provision of service to customers who may not be able to afford the full cost of an energy resource.
3. The energy tariff should raise sufficient revenue to meet the financial requirements of the utility and
finally,
4. The tariff should be simple enough to facilitate billing with available technology while ensuring that
customers understand the billing process.
Calitz sums it up in the best possible way: Tariffs should give customers a clear and accurate
reflection of the costs of energy, and in so doing, should be the means by which the utility recovers
these costs from all customers in a logical, fair, and equitable manner. Tariffs are dynamic; they are
dependent upon, and change with, system load patterns and developments in metering technology.
In summary, Based on Calitz, an electricity tariff should:
1. Recover the supplier costs
2. Be fair and equitable
3. Be logical and simple
4. Promote efficiency
Because of the wide variety of customer types served by a utility no single tariff (with the possible
exception of real-time pricing) can fulfill all of the requirements for each of the customer classes. For
this reason utilities offer a number of tariffs to customers, each of which should meet the general
requirements and optionally provide classes of customers with price signals as incentives to bring about
change in their regular usage patterns in order to achieve a better overall system load profile.

The Cost of Energy Supply

As an example, consider the cost of owning and running a car. The various costs can be converted to an
average cost per km per month. The factors that influence this average cost are illustrated in Fig. 1.

Similarly, one can also address the cost of electricity supply (Fig. 2). The capital costs that are incurred
include the cost of building a power station, erecting a transmission network and setting up metering and
communication. The support costs are those costs that are incurred from the day-to-day running and
operating of the business and include operations costs such as personnel, maintenance costs,
administration costs and marketing and customer service costs. The fuel costs are incurred from the
acquisition of fuel for the power stations such as oil, coal, nuclear fuel, water and gas. The manner in

which customers consume electricity (load factor) will affect the average cost of their electricity. If a
customer uses the electricity intermittently, the average cost to supply this customer will be high.
However, if electricity is used constantly throughout the day, the average cost will be lower.

The further away a customer is from a power station on the supply chain, the more money is spent to
bring electricity to that customer (Transmission & Distribution or T&D costs). This also has an effect on
the average cost to supply this customer. These network costs are often shared as shown in the example
shown in Fig. 3.

Tariff Structure
Tariff structure is essentially intended to recover fixed and variable costs in the generation, transmission,
and distribution of electricity. Particular emphasis is laid here on the method of production or generation.
Not only do these different methods of generating electricity have widely varying average and marginal
costs of production, but they also vary substantially in the proportions of fixed and variable costs.
Consequently, the overall cost structure as it affects tariff will change as the proportion between these
methods of production changes. To explain this, let us consider a familiar example. As we studied in the
earlier lesson, the cheapest form of energy is hydro electricity or large thermal (coal) if available,

although it requires high capital investment. Gas turbines and diesel generators, on the other hand, do not
need such high capital investments. However, their operating costs are extremely high depending on the
prize of fuel.
If electricity is produced using more gas turbines/diesels and less amount of hydropower, the high
operating costs will have to be recovered by means of tariffs. Electricity supply is, after all, a business,
which must pay its way, and thus the systems of charging for electricity are important. A scale of charges
is called a tariff, and different scales devised to cover the cost of the supply are employed by the supply
authorities. Supply authorities may offer different tariffs and it is sometimes the duty of the installation
engineer to assist consumers in deciding the suitable tariff.
As already mentioned, the cost of the electricity supply to the authority may be broadly divided into the
standing costs and running costs. The standing costs are those which have to be meet irrespective of the
amount of electricity supplied from the generating station and the mains. Interest on capital, salaries and
wages, rents, taxes, depreciation of plant and a portion of the cost of fuel and water are some costs
coming under this category. On the other hand, running costs depend upon the actual amount of electricity
produced and supplied. These include further costs of fuel and water, replacement of plant etc.
Then we see that a reasonable tariff to each type of consumer should include a fixed charge, calculated to
cover the standing costs attributable to such a consumer, and a unit charge to cover the running costs per
unit.
A conceptual view of tariff pricing terminology in Fig. 4 illustrates that the tariff structure together with
the tariff rates will provide the tariff. This, together with the other charges, makes up the tariff package,
which, when applied to the consumption profile, gives the electricity cost.

The principles and considerations which the designer of tariffs must take in to account to provide a sound
basis for electricity tariffs, may be divided in to four main groups; economic, socio-political, technical
and accounting/administrative. Inevitably, these four groups cannot be considered independently and
more often than not, there are conflicts between two or more of these.
A tariff system, we said, should be designed to achieve these objectives, as far as possible. As you may
understand, it is often not possible in practice to achieve all these objectives simultaneously. We shall
therefore discuss first, some of the commonly used tariff systems for domestic consumers.

1. Simple Tariff or Uniform Rate Tariff

In this tariff, for all consumers a fixed rate per unit energy consumed. The tariff does not vary with the
increase, or decrease with the consumption of energy. The electric energy consumption at the terminals of
the consumers are measured by energy meters. This is the simplest of all tariff structures.
The main disadvantages of the flat rate system is that there is no discrimination between different types of
consumers since every consumer has to pay equitably for the fixed charges.

2. Flat Rate Tariff System

In this system of tariff, as its name implies, the charges are at a flat rate; however, the consumers are
grouped into different classes and each class is charged at a different uniform rate. The different classes of
consumers are made taking into account their diversity and load factors.
The advantages of this tariff are that it is more fair to different types of consumers and is quite simple in
calculation. The chief merit in this system is simplicity. Nevertheless, this system is rapidly disappearing,
since it cannot represent many complex types of consumers with sufficient accuracy.

3. Two Part Tariff

In the two-part tariff the rate of electrical energy is charged on the basis of maximum demand of the
consumers and the units of energy consumed. Therefore, the total charge to be made from the consumers
are split into two components; the fixed charges and running charges. The fixed charges depend upon the
maximum demand while the running charges depend upon the number of units consumed by the
consumers i.e.
Total charges = b kWmax + c kWh
where b is the charge per kW of maximum demand and c is the charge per kWh of energy consumed.
This type of tariff is mostly applicable to industrial consumers who have high maximum demand.
The advantages are: (1) it is easily understood by the consumers, and (2) it recovers the fixed charges,
which depend upon the maximum demand for the consumers but are independent on the units consumed.
The disadvantages are: (1) the consumers have to pay the fixed charges irrespective on the amount of
energy consumed by the consumer, and (2) there is always errors associated with assessing the maximum
demand of the consumer.

4. Block Rate Tariff

The utility can use this tariff system in two opposed objectives from the point of view of controlling the
energy consumption by consumers. Nevertheless, the main aim of these objectives is to reduce the cost of
electricity production.
To discourage the energy consumption, a given block of energy is charged at a specified rate and the
succeeding blocks of energy are charged at progressively increased rates. This tariff is being used for the
majority of residential and small commercial consumers. It is fairer means of charging used widely is the
(energy consumption) block rate tariff. Therefore, this system has replaced the old two-part tariff and it
eliminates the difficulty of calculating the fixed charge in the system. This obviously has been design to
discourage the consumers from using excessive amounts of electricity i.e. provide a load management
(peak-load reduction) tool. Charges for each block of units increase with the number of units.
For example, in a domestic tariff, monthly charges will be at the rate of Rs. 3.00 for the first 30 units (first
block). For the units in excess of 31 up to 60 (second block), at the rate of Rs. 3.70. For the units in
excess of 61 up to 90 (third block), at the rate of Rs. 4.10. For the units in excess of 91 up to 180 units
(fourth block) at the rate of Rs. 10.60.For all the units in excess of 180, at the rate of Rs. 15.80.
To discourage the energy consumption a specified rate and the succeeding blocks of energy are charged
at progressively reduced rates. The objective of such encouragement of consumption is to reduce the cost
of generation by increasing the load factor (average/maximum loading). From customers point of view,
they get an incentive by consuming more electrical energy as the tariff is reduced for higher blocks of
energy consumption.
Example. An installation comprises of two 3 kW electric furnaces, eight 75 W lamps and ten 100 W
lamps. Calculate the monthly cost of electricity for this consumer, under domestic tariff system. It is
estimated that over a year the average use of both furnaces will be two hours daily and of the lamps 100
hours monthly. The tariff systems is: 0-30 Units @ 3.00 Rs./kWh; 31-60 Units @ 3.70 Rs./kWh; 61-90
Units @ 4.10 Rs./kWh; 91-180 Units @ 10.60 Rs./kWh; Above 180 Units @ 15.80 Rs./kWh; Fixed
Charge = 30.00 Rs./month. Calculate: the total monthly bill and the average unit prize

Solution
For a period of 30 days,
Heating load = (3*2)* 2*30 kWh =360 kWh
Lighting load = {(8*75)+(10*100)}*100/1000 =160 kWh
Total monthly load = (360 +160) kWh = 520 kWh (i.e. 520 Units)
Once the total load for a period of 30 days is calculated, the monthly electricity charges are computer as
follows:
Fifth block = 520 units - {30 (1st block) + 30 (2nd block) + 30 (3rd block) + 90 (4th block)} = 340 units
Cost of first 30 units (1st block) = 30 x 3.00 = Rs. 90.00
Cost of units in excess of 30 units and up to 60 units (2nd block) = 30 x 3.70 = Rs. 111.00
From 61 up to 90 units (3rd block) = 30 x 4.10 = Rs. 123.00
From 91 up to 180 units (4th block) = 90 x 10.60 = Rs. 954.00
Above 180 units (5th block) = 340 x 15.80 = Rs. 5372.00
Monthly minimum charge is 30.00 Rs. (fixed charge)
Therefore the total monthly bill = Rs. (90.00+111.00+123.00+954.00+5372.00+30.00) = Rs. 6680.00

Average unit prize for the above customer during this month would be = Total monthly bill/total monthly
load = 6680.00/520 = Rs. 12.85
The above example illustrates how a typical electricity bill for a domestic consumer is computed. In case
where a maximum demand charge is levy, the maximum demand reading for that particular month on the
maximum demand meter should be recorded. The charges are calculated for this reading.
5. Power Factor Tariff
In this tariff the power factor of the consumers load is taken into consideration. A low power factor
increases the rating of station equipment and line losses. Therefore a consumer having a low power factor
must be penalized. The main types of power factor tariffs are:
(a) kVA Maximum Demand Tariff: it is a modified form of the two-part tariff. In this case, the fixed
charges are made on the basis of the maximum kVA demand instead of the maximum kW demand i.e.
Total charges = b kVAmax + c kWh. As the kVA is inversely proportional to the power factor, a consumer
having a low power factor has to contribute more towards the fixed charges. This type of tariffs encourage
the consumers to improve the power factor of their loads.
(b) Sliding Scale Tariff: is also known as the Average Power Factor Tariff. In this case, an average
lagging power factor, say 0.8 lagging, is taken as the reference. If the power factor of the consumer falls
below this reference power factor, suitable additional charges are made. On the other hand, if their power
factor is above the reference, a discount is allowed to the consumer.
(c) kW and kVAR Tariff: in this type, both active power and reactive power supplied are charges
separately. A consumer having a low power factor will draw more reactive power and hence shall have to
pay more charges.

6. Three-part Tariff
The total charge to be made from the consumer is split into three parts viz., fixed charge, semi-fixed
charge, and running charge i.e.
Total charge = a + b kWmax + c kWh
where a is a fixed charge made during each billing period; it includes interest and depreciation on the cost
of the secondary distribution and labour cost of collecting revenues, b is the charge per kW of maximum
demand, and c is the charge per kWh of energy consumed.
7. Special and General Purpose Tariffs
Domestic consumers constitute only one of the many groups of consumers using electricity. Commercial
premises, farms etc. are offered tariffs particularly applicable to their conditions.
As already mentioned the socio-political aspect plays an important role in the design of tariff structures.
An example we can take is the special tariff, which has been introduced for religious places. Such tariff
shall apply to the supply of electricity to either a place of public religious worship including a private
residence or a residence of a priest or priests, or approved charitable institutions. These kinds of religious
places will be charged at a lower rate per energy consumption block.
For example, the monthly charges of tariff in this group will be at the rate, for example, of Rs. 2.50 per
unit for the first 30 units (first block), for the units in excess of 31 up to 90 (second block) at the rate of
Rs. 2.70. For the units in excess of 91 up to 180 (third block) at the rate of Rs. 4.00. For all the units in
excess of 180, at the rate of Rs. 7.20.
For large power consumers, a two-part tariff is usually imposed. A standing charge depends on the
maximum demand of the consumer, in kW or kVA, while the running charge is the normal type, i.e. for
the amount of kWh used.
General-purpose tariffs are applied to supply of electricity to be use in shops, offices, banks, warehouses,
public buildings, hospitals, educational establishments, places of entertainment and other similar
premises. This again is a little more complex.
Another important group of consumers is the industrial group. Industrial tariffs are applicable to a supply
of electricity used wholly or mainly for motive power or for electro-mechanical processes. This covers
factories, workshops, foundries, and oil mills spinning and weaving mills, pumping stations, port and
dock installations and other similar industrial installations.

Another type of supply, although not common, is the standby supplies. None of the tariffs discussed
above apply to this type. These consumers use their own generators for normal operation and use the
supply from the grid in case of a failure. The rates shall be determined for standby purposes in each case.