Electricity Billing Considerations

Complex systems

Consumers have been billed for decades using a clear and easy to understand system based upon consumption. In most countries there was an energy unit used for electricity billing, the kilowatt/hour and the cubic meter for gas billing. The cost would linearly increase based on the units of energy being recorded as used by the utility meter. The meter would be monthly read and a consumer bill was released.

Current energy billing got more complex as utility companies tried to find ways of being more creative and cater to the apparent needs of clients. Government intervention also introduced various surcharges and additional costs based on consumption. This lead to convoluted systems that use variable rates, tiered pricing, service fees, various surcharges. Some bills are even seasonally adjusted.

Complex billing is one key reason that energy consumption and its true impact is harder to determine. In order to have effective cost reductions it is necessary to understand your current billing and contract terms.

Current contract and billing terms

It is important to know your current billing system and this is presented both in the utility provider contract as well as it is reflected on your bills. Although they may be better offers to the one that is currently enforced, it is important to understand the current terms and how well your current consumption pattern fits them so you need to make some initial assessments before taking any action.

Being informed of other offers from your utility company is helpful in finding out the best long term approach but you should not have extreme expectations. Consumption alone is still the biggest factor in the total cost. There may be some difficulty in moving from one billing choice to another from the same utility company such as a specific contract duration being passed or other limitations.

Note that even though a flat rate based on consumption is the most obvious option and should be the cheapest, utility companies actively discourage such a choice by making the energy unit price much higher than on other ways of billing, if this option is still available.

Electricity billing

The actual energy bill is rarely determined clearly, through a simple multiplication of energy unit cost with consumed energy units, as metered. Modern utility contracting systems use complex calculations to determine the total bill cost for a given month. This cost is computed, generally, by combining the following separate costs.

Total cost= Demand or service charge + Energy cost + Free market cost adjustment (if exists) + Renewable power promotion cost + Surcharges (Value Added Tax and others)

Demand or service charge

A fixed monthly cost that is established through contract, based on the consumption profile agreed upon. Sometimes, agreeing to a demand or service charge can result in a lower energy unit cost agreed through contract, if an option for a only a flat rate energy unit consumption also exists. In other cases, as in Japan, the demand charge is mandatory and it depends on contracted maximum installed power tiers, being halved when there is no energy consumption recorder on location.

Energy cost or charge

Energy cost = Energy unit cost x monthly energy units consumed

Flat rate system (not used anymore)

Previously, energy was charged only based on a flat rate per unit of consumption. The energy unit cost could be annually adjusted and was decided by the national government. Today there are no developed countries still using the flat rate alone to determine energy cost.

Tiered consumption range (most popular)

This system is devised to encourage consumers to use less energy. Commonly, there are three price tiers for the energy unit, and any consumption over a specific range is billed separately.

On and Off-peak consumption tiers

There are various ways to consider on and off-peak energy costs, but the most popular one is based on hourly intervals that define day/night consumption. Some utility providers offer more flexibility in choosing on and off-peak pricing plans.

The most important aspect is that night or off-peal consumption is much cheaper than peak or peak consumption, by as much as 50%

Free Market cost adjustment

With liberalized energy markets in most countries, there is an additional adjustment either applied in the base energy unit price or separately represented by a fuel cost adjustment. It is proportional to the energy consumption in a given month.

Free Market cost adjustment = adjustment rate x monthly energy consumption

This adjustment is established in most countries on a yearly base or monthly, the latter being the case in Japan. A monthly fuel cost adjustment may be, in the future, applied to other developed countries.

Renewable energy power promotion cost

This cost is a subsidy being offered to promote building more renewable energy power production facilities. The subsidy is being directed by the government to cover the initial additional cost of investing in such expensive facilities.

In Europe, this expense is tied to the so-called green certificates. It is proportional to the energy consumption in a given month.

Renewable energy power promotion cost = rate x monthly energy consumption

Notes: Renewable energy promotion and free market cost adjustments, that are non-negotiable, do have an influence in the total cost of energy that is billed but this is limited. The largest influence is still based on energy unit price alone, based on tiered consumption. This means that energy unit consumption still has the biggest cost impact.