Definition of Tariff

Tariff is defined as the rate or price charged by an electricity supply company for the electrical energy supplied to consumers.

It represents the total cost paid by a consumer for using electrical energy during a specific period.$$\text{Electricity Bill} = \text{Energy Consumed (kWh)} \times \text{Rate per Unit}$$

In many practical cases, the tariff may include additional components such as demand charges, fixed charges, and power factor penalties

Objectives of tariff

Electrical energy is sold at such a rate so that it not only returns the cost but also earns
reasonable profit. Tariff should include the following objectives:

• Recovery of cost of producing electrical energy at the power station.
• Recovery of cost on the capital investment in transmission and distribution
• systems.
• Recovery of cost of operation and maintenance of supply of electrical energy
• A suitable profit on the capital investment.

Characteristics of a Tariff

(i) Proper return:

• The total receipts from the consumers must be equal to the cost of producing and supplying electrical energy plus reasonable profit.
• This will enable the electric supply company to ensure continuous and reliable service to the consumers.

(ii) Fairness:

• The tariff must be fair so that different types of consumers are satisfied with the rate of charge of electrical energy.
• A big consumer should be charged at a lower rate than a small consumer with fixed charges and thus reducing overall production cost of electrical energy.
• A consumer whose load conditions do not deviate much from the non-variableload should be charged at a lower rate than big consumers with variable load.

(iii) Simplicity:

• The tariff should be simple so that an ordinary consumer can easily understand it.
• A complicated tariff may cause an opposition from the public which is generally distrustful of supply companies.

(iv) Reasonable profit:

• The profit element in the tariff should be reasonable.
• An electric supply company is a public utility company and generally enjoys the benefits of monopoly.
• The investment is relatively safe due to non-competition in the market and the profit is to be restricted to 8% or so per annum.

(v) Attractive:

• The tariff should be attractive so that a large number of consumers are encouraged to use electrical energy.
• Efforts should be made to fix the tariff in such a way so that consumers can pay easily.

Types of Electricity Tariff

Simple tariff:

In this tariff, the rate per unit of electricity remains constant, regardless of the amount of energy consumed.

Formula

$$\text{Total Cost} = E \times R$$

Where
E = Energy consumed (kWh)
R = Rate per kWh

Example

If a consumer uses 300 kWh and the rate is ₹6 per kWh

$$Cost = 300 \times 6 = ₹1800$$

Advantages of Simple Tariff:

• In simple tariff, the cost does not vary with increase or decrease in number of units consumed.
• The consumption of electrical energy at the consumer terminals is recorded by means of an energy meter.
• This is the simplest of all tariffs and is easily understood by the consumers.

Disadvantages of Simple Tariff:

• Every consumer has to pay equally for the fixed charges irrespective of load variation.
• The cost per unit delivered is high.
• It does not encourage the use of electricity.

Flat rate tariff:

When different types of consumers are charged at different uniform per unit rates, it is called a flat rate tariff.

• In this type of tariff, the consumers are grouped into different classes and each class of consumers is charged at a different uniform rate.
• The different classes of consumers are made taking into account their diversity and load factors.

Under flat rate tariff, different types of consumers are charged at different fixed rates per unit of electricity.

For example

• Domestic consumers → ₹5 per kWh
• Commercial consumers → ₹6 per kWh
• Industrial consumers → ₹7 per kWh

Formula

$$\text{Total Cost} = E \times R_f$$

Where
Rf = Flat rate for that consumer category

Advantages of Flat rate tariff:

• This tariff is more benefit to different types of consumers
• Flat rate tariff is quite simple in calculations.

Disadvantages of Flat rate tariff:

• Separate meters are required for lighting load, power load etc.
• The application of such a tariff is expensive and complicated.
• A particular class of consumers is charged at the same rate irrespective of the magnitude of energy consumed.

Block rate tariff:

When a given block of energy is charged at a specified rate and the succeeding blocks of energy are charged at progressively reduced rates, it is called a block rate tariff.

• The energy consumption is divided into blocks and the price per unit is fixed in each block.
• The price per unit in the first block is the highest and it is progressively reduced for the succeeding blocks of energy.
• For example, the first 30 units may be charged at the rate of 60 paise per unit; the next 25 units at the rate of 55 paise per unit and the remaining additional units may be charged at the rate of 30 paise per unit.

Advantages of Block rate Tariff:

• The consumer gets an incentive to consume more electrical energy.
• This increases the load factor of the system and hence the cost of generation is reduced.

Disadvantages of Block rate Tariff:

• It lacks a measure of the consumer demand.
• This type of tariff is being used for majority of residential and small commercial consumers.

Two-part tariff:

When the rate of electrical energy is charged on the basis of maximum demand of the consumer and the units consumed, it is called a two-part tariff.

• In two-part tariff, the total charge to be made from the consumer is split into two components viz., fixed charges and running charges.
• The fixed charges depend upon the maximum demand of the consumer while the running charges depend upon the number of units consumed by the consumer.
• Thus, the consumer is charged at a certain amount per kW of maximum demand plus a certain amount per kWh of energy consumed i.e. Total charges = Rs (b × kW + c × kWh)

where,

b = charge per kW of maximum demand
c = charge per kWh of energy consumed

• This type of tariff is mostly applicable to industrial consumers who haveappreciable maximum demand.

Advantages of two part Tariff:

• It is easily understood by the consumers.
• It recovers the fixed charges which depend upon the maximum demand of the consumer.
• It is independent of the units consumed.

Disadvantages two part Tariff:

• The consumer has to pay the fixed charges irrespective of energy consumed
• There is always error in assessing the maximum demand of the consumer.

Maximum demand tariff:

It is similar to two-part tariff with the only difference that the maximum demand is actually measured by installing maximum demand meter in the premises of the consumer.

Advantages of Maximum demand tariff:

• The maximum demand is assessed merely on the basis of the rateable value.
• This type of tariff is mostly applied to big consumers.

Disadvantages of Maximum demand tariff:

• It is not suitable for a small consumer.
• Separate maximum demand meter is required.

Power factor tariff:

The tariff in which power factor of the consumer load is taken into consideration is known as power factor tariff.

• A low power factor increases the rating of station equipment and line losses.
• A consumer having low power factor must be penalized.

The following are the important types of power factor tariff:

(i)kVA maximum demand tariff :

• It is a modified form of two-part tariff.
• In this case, the fixed charges are made on the basis of maximum demand in kVA and not in kW.
• A low power factor consumer has to contribute more towards the fixed charges.

(ii) Sliding scale tariff :

• This is also known as average power factor tariff.
• In this case, an average power factor, say 0·8 lagging, is taken as the reference.
• If the power factor of the consumer falls below this factor, suitable additional charges are made.
• If the power factor is above the reference, a discount is allowed to the consumer.

Three-part tariff:

When the total charge to be made from the consumer is split into three parts viz., fixed charge, semi-fixed charge and running charge, it is known as a three-part tariff.

Total charge = Rs (a + b × kW + c × kWh)

Where,

a = fixed charge made during each billing period.
b = charge per kW of maximum demand,
c = charge per kWh of energy consumed.

• It may be seen that by adding fixed charge to two-part tariff, it becomes three-part tariff.
• The principal objection of this type of tariff is that the charges are split into three components.
• This type of tariff is generally applied to big consumers.