Flat Rates

Flat rate tariff is actually a name used for two different types of tariff structures. The first one being one
that charges a flat fixed price for every kWh consumed. This means that variation in costs to the
consumer is directly linked to their own consumption [4].

The definition that will be employed in this article refers to a capacity based definition from GIZ. The flat
rate tariff is defined as a flat, unchanging charge that allows the user to consume up to a maximum
amount[5]. These rates are also sometimes called fixed rates and are an example of a power tariff. Power
tariffs charge based on Watts, rather than kWh. These rates demand that a user’s consumption never
exceeds a set wattage at any given time, lest they cause a load limiter to cut-off supply until usage goes
down again. This usually means the consumer cannot use all their appliances simultaneously, or must
group them together such that total power usage does not exceed their given limit [6]. In India, these
rates can range from 60 to 200 INR/month (€ 0.81 – € 2.72) which in Bihar account for 7 to 10% of a
household’s monthly income. Customers with metered supply however pay lower rates than those
charged by the flat rate tariff [2]. In Ethiopia, users consuming less than or equal to 25 kWH are charged at
a flat rate of 0.273 ETB/month (€ 0.02). The next rate of 0.34 ETB/month (€ 0.24) is charged for users in
the 26-50 kWH range[7].

Because this rate is fixed regardless of the cost of power generation or amount of consumption, flat
rates inherently possess a cost for premium. This is called the hedging cost. As flat-rates assume a
singular rate for a period of time, consumers are offered a stability in energy cost despite the variance in
production costs or energy consumption. This means the monetary risk is with the supplier/utility, hence
the tariff comes with a built-in charge for this premium provided [8].

However, flat rate tariffs remain prevalent due to the ease of service on the utility’s part. Where
measurement of actual consumer usage is costly [1], as is the case in mini-grids and underdeveloped
electricity networks, a flat rate tariff is the most optimal choice[2] due to the increased cost of advance
metering technology[9] and the economic efficiency afforded[10]. In distant networks, the system
experiences lower demand and a smaller economy of scale. Due to this, profitability is difficult to
achieve let alone metering. Where metering is applied, only the most basic technologies can be used
due to the cost[11]. The high cost of metering can also be attributed to the need to measure, process or
calculate the data. This induces administrative cost and/or parasitic energy costs for automated
systems[12], making metering expensive in distributed situations and flat rate tariffs favourable [6].

List of possible impacts

Due to flat rates’ independence from actual usage, it fails to reflect the true costs of energy used.
Another possible impact is that flat rate tariffs contribute to inequity between different types of
consumption, where one household may use more, and another much less despite the same rate
charged.
Much of the information regarding the impacts of flat electricity tariffs are derived from studies that
propose new tariff structures (see case studies below). The comparison between flat rate tariffs as a
basis, and a new tariff offer insights into the impact of flat rate tariffs themselves.

There are three relevant impacts to expect from flat rates: a) higher prices for consumers (cost of
premium), b) people consuming less per more for their energy services (cross-subsidisation), and c)
people consume more or less as their optimum because they cannot retrieve this information from their
energy bill.

a) Cost of Premium: People pay more than with consumption based tariffs

Flat rate tariffs tend to be more expensive for the consumer when compared to a consumption based
tariffs. Part of this is because of the hedging cost of premium associated. Figure 1 shows how different
tariff structures have embedded risk. Clearly, RTPs (Real Time Pricing) have the highest risk, but also the
highest reward. The uncertainty of how much a consumer will have to pay for his/her consumption in
the next time period increases risk for the household. However, should the user be able to shift his/her
consumption to a ‘cheaper’ time, they also obtain the highest reward. As consumers effectively pass on
risk to the utility, the supplier must raise their charge of service to account for this uncertainty. On
average, an Australian household is able to save 1-2% of their yearly electricity expenditure by switching
to a tariff that employs real time pricing [9].

However, in the bigger scheme of things, RTP is more expensive to the utility and may increase
electricity tariffs regardless. In order to accurately apply such a tariff, a smarter grid is necessary,
equipped with additional infrastructure. The costs of this currently outweigh the savings offered by real
time pricing though[9], hence the persistence of flat rates in countries like India and Nepal.
Figure 1: Risk and Reward Trade-off of different tariff systems [13]

b) Cross-subsidization: People who consume less pay more for their energy services

Another impact of flat rate tariffs is unintended cross-subsidizing. In a consumer base, there are three
types of users: average, peaky, and flat. The average middle class urban user has consumption that is
neither flat nor peaky, using 25% of their electricity during peak times. The peaky user has large spikes in
use during peak load and uses 40% of their electricity during this time. Finally, the flat user has a rather
consistent demand curve, only using electricity during peak load 10% of the time [13]. Say all three user
types are charged using a flat rate tariff. As the peaky user increases their consumption during peak
load, the price of energy they use rises as well, enough that this price sits above the tariff charged. As
flat and average users most often do not have peak load usage, they should be able to avoid these costs
as well.

The result is that while the peaky user is exceeding the cost of electricity as priced by the flat rate tariff,
the flat and average user ends up paying for these raised costs. Effectively a form of cross-subsidizing [14].
This is made worse by the fact that flat users are often those in the lower income levels of society [13]. As
such, several studies in North America (2010) and India (2016) by the IEEE & the World Bank
recommend that lower income households would save far more, and pay less with per-usage rates in
lieu of flat rates. This much is true however, only in cases where households successfully respond to
variations in price. This is perhaps the biggest deterrent of RTP at the moment, and a  reason for flat
rates tariffs’ continued utilization[15]. 

c) Hidden Generation charge: People cannot retrieve their consumption pattern from their energy bill

Flat rate tariffs effectively shield consumers from fluctuating generation charges. However as a
consequence, the users are unaware of the cost of generation as well. Where /kWh rates are able to
reflect this, flat rate tariffs on their own make this comparison impossible. As such, an estimated /kWh
rate based on the flat rate tariff is often made to enable this comparison. However, as Greacen et al.
puts it, this is an apples-to-oranges comparison as flat rates serve to recover cost in a vastly different
grid. This feature is beneficial for private suppliers but must be regulated to ensure flat rate tariffs are
set at cost reflective margins[6].

How much energy is wasted or not used in the case of electricity flat rates?

While it is known that some consumers experience under-consumption or over-consumption when

charged with a flat rate tariff, specific data to support such claims are hard to come by [10]. This
phenomenon manifests in leaving lights on as it is paid for anyway, or simply not turning off an
appliance for the same reason. In this manner, flat rates heavily discourage efficient and conscientious
use of electricity. One such method of mitigating this is by applying a ‘per device’ price. This allows a
saving by ridding the need for a load limiter. However, the saving from not installing a load limiter
necessitates that each household’s device inventory is up to date. This means costly spontaneous visits
from the utility to ensure there are no additional devices that exceed the agreed upon limit [6].

Flat rates are designed to cover the cost of an average consumer, naturally, some consumer groups will
over consume and others, under consume. This behaviour leads to some cross-subsidizing and
inequitable pricing. Additionally, due to a lack of metering, it is practically impossible to measure how
much energy is unused—relative to the average expected consumption—or used in excess [10].

Unfortunately, no study examined for this article lists an example of how much energy is wasted with
flat rates.

What is known from several studies such as those conducted by Rajendra Singh et.al. (World Energy
Council) is that flat rates have reason to be avoided. Flat rates have been found to lead to over
consumption as well as inhibits energy efficiency (systemically and in terms of usage practice) [16].

Examples of Impacts/Case Studies

On the Inequity of Flat Rate Pricing | Australia, 2014

 Looks at the effects of flat rate pricing on consumer groups

 Compares these effects to those known for smart meter enabled households

 Findings reveal that half of a population effectively cross-subsidizes the other half

 The ones who subsidize are most often households already in financial hardship

 Gains from applying real-time pricing and demand response can accrue to AUS 1.6 Billion per
annum for the East Coast grid

Impacts of Small Scale Electricity Systems | Asia, 2016

 Studies the impacts of different tariff structures in India and Nepal

 Finds recommendations to improve affordable energy access:

o There is a preference for a micro-grid compared to extending access to the larger

national network

o Though the norm in India is a flat rate, metering is an increasingly growing option
among suppliers due to rising consumption
 o Metering and per-usage rates provide a viable way of reducing cost to low consumption
consumers, and preventing violations for the supplier

Retail Electricity Pricing and Rate Design in Evolving Markets | North America, 2007

 Assesses wholesale and retail electricity pricing

 Compares different tariff structures

 Recognizes the value of economic efficiency due to flat rates

 Recommends a more seasonal form of flat rate tariffs

 Finds that flat rates applied to all classes is inequitable

 Time-based tariffs only work best for the consumer where one is involved and responds to price
signals

Conclusion

The article revealed that the assumptions made at the start of this article have been proven to be true.
Flat rate tariffs, while convenient for both parties do have several downsides that make it unfair for
different consumption patterns. Consumers using larger quantities will benefit, while those using less
end up cross-subsidizing. This inequity may aggravate the energy and wealth gap and will have to
change to serve each consumer equally and fairly. This effect of course is modified by the wealth and
consumption distribution of a community, where a community with more uniform and similar usage
may benefit from lower tariffs. Flat rate tariffs will continue to be used where metering infrastructure is
expensive and comes at a severe cost to the consumers. Especially in mini-grids, maximum load flat rate
tariffs help regulate consumption with minimal added cost [17]. The point at which a metered tariff
becomes more financially viable than a flat tariff in a mini grid is case-dependent. Factors like size,
number of connected users, energy source, and the need to match generation costs in the area, all
contribute to this[6].