Electricity Billing Considerations
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 there may be better offers to the one that is currently enforced, it is good to know 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.
Partial cost = Demand or service charge + Energy cost + Free market cost adjustment (if exists) + Renewable power promotion cost
Total cost = Partial 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, from 10 to 60 Amps maximum current draw, being halved when there is no energy consumption recorded on location.
Energy cost or charge
Energy charge rate (partial cost calculation)
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. None of the developed countries still use the flat rate alone to determine energy cost.
Keep in mind that energy unit cost is also a value determined through production and distribution costs, that may or may not be separately reflected on the energy bill. The calculus below is repeated for each consumption price tier presented below.
Energy cost = Energy unit cost x monthly energy units consumed
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. The model below is based on Japan.
Another European model, for instance, partially subsidies the energy price ending in a discount of 47% at tier 1 and 25% at tier 2 from the full energy unit price, with different consumption ranges such as below 100 kw/h and between 100-300 kw/h. Consumption ranges and discounts can change over time.
| Tier | Consumption range | Energy unit cost |
|---|---|---|
| 1 | 0-120 kw/h | 25% discount of full price |
| 2 | 120-300 kw/h | 15% discount of full price |
| 3 | 300 kwh/h and more | full price |
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 model below is from Japan. In other countries cost rate adjustments may differ.
| Tier | Time | Energy unit cost |
|---|---|---|
| 1 | 8-22 (daytime or peak) | full price |
| 2 | 22-8 (nighttime or off-peak) | half price |
The most important aspect is that night or off-peak consumption is considerably cheaper than on-peak consumption, by as much as 50%
Free market cost adjustment (mandatory)
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 value x monthly energy consumption
This adjustment is established in most countries on a yearly or monthly base, the latter being the case in Japan. A monthly fuel cost adjustment may be, in the future, applied to other developed countries.
Other costs
Renewable energy power promotion (mandatory)
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
Renewable energy promotion and free market cost adjustments, non-negotiable components established through contract, do have an influence in the total cost of energy that is billed but this is limited. The largest influence is still due to energy unit price, based on tiered consumption, as well as the amount of energy consumption that directly increases other costs.
Surcharges (mandatory)
While renewable energy power promotion cost, fuel cost adjustments and various excises may be considered consumption surcharges, this is typically reserved for Value Added Tax that is applied to all partial costs.
The V.A.T. as is commonly known, can change by national government decision. It is typically between 5-25%, depending on country and product or service.