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Electrical Energy Tariffs

Introduction to Tariffs
Electrical energy is delivered to numerous consumers, and the tariff, or the rate at
which this energy is sold, is crucial. A well-structured tariff is essential for the electric
supply company to:

Recover the total cost of producing electrical energy.

Earn a reasonable profit on capital investment.
Ensure that the tariff is fair and encourages electricity consumption, especially
in public sector contexts where scrutiny is high.

Objectives of a Tariff
A tariff should be designed to cover several key aspects:

Recovery of Production Costs: Covering the expenses incurred in generating

electrical energy at the power station.
Capital Investment Recovery: Recouping the costs associated with
investments in transmission and distribution systems.
Operational Cost Recovery: Covering the costs of operation and maintenance,
including metering equipment and billing processes.
Profit on Investment: Earning a suitable profit on the capital invested in the
infrastructure.

Desirable Characteristics of a Tariff

A good tariff should exhibit the following characteristics:

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Proper Return: Ensuring that the total revenue from consumers is equal to the
cost of production, supply, and a reasonable profit.
Fairness: Maintaining fairness across different consumer types, with lower rates
for larger consumers due to the spreading of fixed charges.
Simplicity: Being easily understandable for the average consumer to avoid
distrust and opposition.
Reasonable Profit: Restricting profit margins to a reasonable percentage (e.g.,
around 8% per annum) due to the monopolistic nature and lower risk of
investment.
Attractiveness: Encouraging widespread use of electrical energy by making the
tariff attractive and easy to pay.

Types of Tariffs

Simple Tariff
A simple tariff, also known as a uniform rate tariff, involves a fixed rate
per unit of energy consumed.

The price per unit remains constant regardless of consumption levels.

Energy consumption is measured using an energy meter.
Disadvantages:
No discrimination between different consumer types.
Higher cost per unit delivered.
Does not incentivize increased electricity use.

Flat Rate Tariff

A flat rate tariff charges different consumer types at different uniform
rates per unit.

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Consumers are divided into classes, each charged a different uniform rate.
Rates vary based on the type of load (e.g., lighting vs. power).
Advantages:
More fair to different types of consumers.
Simple to calculate.
Disadvantages:
Requires separate meters for different loads, increasing costs and
complexity.
Doesn't account for the magnitude of energy consumed within a class.

Block Rate Tariff

A block rate tariff charges a specified rate for a given block of energy,
with succeeding blocks charged at progressively reduced rates.

Energy consumption is divided into blocks, each with a fixed price per unit.
The price per unit decreases as consumption increases.
Advantage:
Incentivizes consumers to use more electricity, improving the system's
load factor.
Disadvantage:
Lacks consideration of the consumer's demand.

Two-Part Tariff
A two-part tariff charges based on the consumer's maximum demand
and the units consumed.

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The total charge is divided into fixed and running charges.

Fixed charges depend on the maximum demand.
Running charges depend on the number of units consumed.
Equation:

T otal Charges = Rs(b ⋅ kW + c ⋅ kW h)

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

Advantages:
Easy to understand.
Recovers fixed charges independent of units consumed.
Disadvantages:
Consumers pay fixed charges regardless of energy consumption.
Potential inaccuracies in assessing maximum demand.

Maximum Demand Tariff

A maximum demand tariff is similar to a two-part tariff, but the
maximum demand is measured using a meter.

Maximum demand is accurately measured, removing estimation inaccuracies.

Suitable for large consumers but not for small consumers due to the cost of the
meter.

Power Factor Tariff

A power factor tariff takes into account the power factor of the
consumer's load.

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Penalizes consumers with low power factors due to increased equipment

ratings and line losses.
Types of power factor tariffs:
kVA Maximum Demand Tariff: Fixed charges based on maximum
demand in kVA, encouraging consumers to improve their power factor.
Sliding Scale Tariff: Uses an average power factor as a reference; charges
increase or decrease based on the consumer's power factor relative to the
reference.
kW and kVAR Tariff: Charges separately for active power (kW) and
reactive power (kVAR), penalizing low power factors.

Three-Part Tariff
A three-part tariff splits the total charge into fixed, semi-fixed, and
running charges.

Equation:

T otal Charge = Rs(a + b ⋅ kW + c ⋅ kW h)

Where:
fixed charge per billing period
a =

b = charge per kW of maximum demand

c = charge per kWh of energy consumed

Combines aspects of two-part tariffs with an additional fixed charge.

Generally applied to large consumers.

Solved Examples

Example 5.1
A consumer has a maximum demand of 200 kW at a 40% load factor. The tariff is Rs.
100 per kW of maximum demand plus 10 paise per kWh. Find the overall cost per
kWh.

Solution:

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Units Consumed per Year:

200 kW ⋅ 0.4 ⋅ 8760 hours = 700, 800 kW h

Annual Charges:

Rs(100 ⋅ 200 + 0.10 ⋅ 700, 800) = Rs 90, 080

Overall Cost per kWh:

90, 080
Rs = Rs 0.1285 = 12.85 paise
700, 800

Example 5.2
The maximum demand of a consumer is 20 A at 220 V, and their total energy
consumption is 8760 kWh. The energy is charged at 20 paise per unit for the first
500 hours of maximum demand use per annum, plus 10 paise per unit for additional
units. Calculate (i) the annual bill and (ii) the equivalent flat rate.

Solution:

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Assume a load factor and power factor of unity.

Maximum Demand:

20 A ⋅ 220 V = 4.4 kW

(i) Annual Bill:

Units consumed in 500 hours:

4.4 kW ⋅ 500 hours = 2200 kW h

Charges for 2200 kWh:

Rs 0.20 ⋅ 2200 = Rs 440

Remaining units:

8760 kW h − 2200 kW h = 6560 kW h

Charges for 6560 kWh:

Rs 0.10 ⋅ 6560 = Rs 656

Total annual bill:

Rs(440 + 656) = Rs 1096

(ii) Equivalent Flat Rate:

1096
Rs = Rs 0.125 = 12.5 paise
8760

Example 5.3
Two tariffs are offered: (a) Rs 100 plus 15 paise per unit; (b) A flat rate of 30 paise
per unit. At what consumption level is the first tariff more economical?

Solution:

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Let x be the number of units at which both tariffs are equal.

Equation:

100 + 0.15x = 0.30x

100 = 0.15x

100
x = = 666.67 units
0.15

Tariff (a) is more economical if consumption is more than 666.67 units.

Example 5.4
A supply is offered on the basis of fixed charges of Rs 30 per annum plus 3 paise per
unit or, alternatively, at the rate of 6 paise per unit for the first 400 units per annum
and 5 paise per unit for all additional units. Find the number of units taken per annum
for which the cost under the two tariffs becomes the same.

Solution:

Let x > 400 be the number of units taken per annum for which the annual
charges due to both tariffs become equal.
Annual charges due to first tariff:

Rs(30 + 0.03x)

Annual charges due to second tariff:

Rs[(0.06 ⋅ 400) + (x − 400) ⋅ 0.05] = Rs(4 + 0.05x)

As the charges in both cases are equal:

30 + 0.03x = 4 + 0.05x

26 = 0.02x

26
x = = 1300 kW h
0.02

Example 5.5

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An electric supply company with a maximum load of 50 MW generates 18 ⋅ 10 units 7

per annum. The supply consumers have an aggregate demand of 75 MW. The annual
expenses, including capital charges, are: For fuel = Rs 90 lakhs, Fixed charges
concerning generation = Rs 28 lakhs, Fixed charges concerning transmission and
distribution = Rs 32 lakhs. Assuming 90% of the fuel cost is essential to running
charges and the loss in transmission and distribution is 15% of kWh generated,
deduce a two-part tariff to find the actual cost of supply to the consumers.

Solution:

Annual Fixed Charges:

For generation: Rs 28 ⋅ 10 5

For transmission and distribution: Rs 32 ⋅ 10 5

For fuel (10%): Rs 0.1 ⋅ 90 ⋅ 10 = Rs 9 ⋅ 10

5 5

Total annual fixed charge: Rs (28 + 32 + 9) ⋅ 10 5 5

= Rs 69 ⋅ 10

Cost per kW of Maximum Demand:

5
69 ⋅ 10
Rs = Rs 92
3
75 ⋅ 10

Annual Running Charges:

Cost of fuel (90%): Rs 0.9 ⋅ 90 ⋅ 10 5
= Rs 81 ⋅ 10
5

Units Delivered to Consumers:

7 7
0.85 ⋅ 18 ⋅ 10 = 15.3 ⋅ 10 kW h

Cost per kWh:

5
81 ⋅ 10
Rs = Rs 0.053 = 5.3 paise
7
15.3 ⋅ 10

Tariff: Rs 92 per kW of maximum demand plus 5.3 paise per kWh.

Example 5.6

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A generating station has a maximum demand of 75 MW and a yearly load factor of

40%. Generating costs, inclusive of station capital costs, are Rs. 60 per annum per
kW demand plus 4 paise per kWh transmitted. The annual capital charges for the
transmission system are Rs 20,00,000, and for the distribution system, Rs 15,00,000;
the respective diversity factors being 1.2 and 1.25. The efficiency of the transmission
system is 90%, and that of the distribution system, inclusive of substation losses, is
85%. Find the yearly cost per kW demand and the cost per kWh supplied (i) at the
substation (ii) at the consumers' premises.

Solution:

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Maximum Demand:

75 M W = 75, 000 kW

Annual Load Factor:

40

(i) Cost at Substation:

(a) Annual Fixed Charges:

Generation cost: Rs 60 ⋅ 75 ⋅ 10 = Rs 4.5 ⋅ 10
3 6

Transmission cost: Rs 2 ⋅ 10 6

Total annual fixed charges at the substation: Rs

6 6
(4.5 + 2) ⋅ 10 = Rs 6.5 ⋅ 10

Aggregate of all maximum demands by the various substations:

3 3
(75 ⋅ 10 ) ⋅ 1.2 = 90 ⋅ 10 kW

Annual cost per kW of maximum demand:

6
6.5 ⋅ 10
Rs = Rs 72.22
3
90 ⋅ 10

(b) Running Charges:

Cost of 1 kWh transmitted to the substation is 4 paise.
Transmission efficiency is 90%, so for every kWh transmitted, 0.9
kWh reaches the substation.
Cost per kWh at substation:

4
= 4.45 paise
0.9

Hence, at the substation, the cost is Rs 72.22 per annum per kW of

maximum demand plus 4.45 paise per kWh.

(ii) Cost at Consumers' Premises:

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Total annual fixed charges at consumers' premises:

6 6
Rs(6.5 + 1.5) ⋅ 10 = Rs 8 ⋅ 10

Aggregate of maximum demands of all consumers:

3 3
(90 ⋅ 10 ) ⋅ 1.25 = 112.5 ⋅ 10 kW

Annual cost per kW of maximum demand:

6
8 ⋅ 10
Rs = Rs 71.11
3
112.5 ⋅ 10

Distribution efficiency is 85%, so for each kWh delivered from the

substation, only 0.85 kWh reaches the consumers' premises.
Cost per kWh at consumers' premises:

4.45
= 5.23 paise
0.85

Hence, at the consumers' premises, the cost is Rs 71.11 per annum per
kW of maximum demand plus 5.23 paise per kWh.

Example 5.7
Determine the load factor at which the cost of supplying a unit of electricity from a
Diesel and a Steam station is the same if the annual fixed and running charges are as
follows:

Station Fixed Charges Running Charges

Diesel Rs 300 per kW 25 paise/kWh

Steam Rs 1200 per kW 6.25 paise/kWh

Solution:

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Suppose energy supplied in one year is 100 kWh. Let L be the load factor at
which the cost of supplying a unit of electricity is the same for both diesel and
steam stations.

Diesel Station:

Average power = 100

= 0.0114kW
8760

Maximum demand = 0.0114

kW
L

Fixed charges = Rs 300 ⋅ 0.0114

= Rs
L
3.42

Running charges = Rs 100 ⋅ 0.25 = Rs 25

Fixed and running charges for 100 kWh = Rs( 3.42

L
+ 25). . . (i)

Steam Station:

Fixed charges = Rs 1200 ⋅ = Rs

0.0114

L
13.68

Running charges = Rs 100 ⋅ 0.0625 = Rs 6.25

Fixed and running charges for 100 kWh = Rs( 13.68

L
+ 6.25). . . (ii)

As the two charges are the same, equate (i) and (ii):

3.42 13.68
+ 25 = + 6.25
L L

13.68 − 3.42
= 25 − 6.25
L

10.26
= 18.75
L

10.26
L = = 0.5472 = 54.72
18.75

Tutorial Problems

1.
A consumer has a maximum demand of 100 MW at a 60% load factor. If the tariff is
Rs 20 per kW of maximum demand plus 1 paise per kWh, find the overall cost per
kWh.

Answer: [1.38 paise]

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2.
The maximum demand of a consumer is 25A at 220 V, and their total energy
consumption is 9750 kWh. If energy is charged at the rate of 20 paise per kWh for
500 hours use of maximum demand plus 5 paise per unit for all additional units,
estimate their annual bill and the equivalent flat rate.

Answer: [Rs 900; 9.2 paise]

3.
A consumer has an annual consumption of 2 ⋅ 10 units. The tariff is Rs 50 per kW of
5

maximum demand plus 10 paise per kWh. (i) Find the annual bill and the overall cost
per kWh if the load factor is 35%. (ii) What is the overall cost per kWh if the
consumption were reduced by 25% with the same load factor? (iii) What is the
overall cost per kWh if the load factor were 25% with the same consumption as in
(i)?

Answer: [(i) Rs 23,400; 11.7 paise (ii) 11.7 paise (iii) 12.28 paise]

4.
The daily load of an industry is 200 kW for the first one hour, 150 kW for the next
seven hours, 50 kW for the next eight hours, and 1 kW for the remaining time. If the
tariff in force is Rs. 100 per kW of maximum demand per annum plus 5 paise per
kWh, find the annual bill.

Answer: [Rs 50,258.5]

5.
A consumer requires one million units per year, and their annual load factor is 50%.
The tariff in force is Rs. 120 per kW per annum plus 5 paise per unit consumed.
Estimate the saving in their energy costs if they improve the load factor to 100%.

Answer: [Rs 13,692]

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6.
An industrial undertaking has a connected load of 100 kW. The maximum demand is
80 kW. On average, each machine works for 60 per cent of the time. Find the yearly
expenditure on electricity if the tariff is Rs 10,000 + Rs 1000 per kW of maximum
demand per year + Re 1 per kWh.

Answer: [Rs 615,600]

Example 5.8
Calculate the annual bill of a consumer whose maximum demand is 100 kW, power
factor = 0.8 lagging, and load factor = 60%. The tariff used is Rs 75 per kVA of
maximum demand plus 15 paise per kWh consumed.

Solution:

Units consumed per year = Maximum demand x L.F. x Hours in a year

5
(100) ⋅ (0.6) ⋅ (8760)kW h = 5.256 ⋅ 10 kW h

Maximum demand in kVA = 100

p.f .
=
100

0.8
= 125

Annual bill = Max. demand charges + Energy charges

5
Rs(75 ⋅ 125) + Rs(0.15 ⋅ 5.256 ⋅ 10 )

Rs9375 + Rs78, 840 = Rs88, 215

Example 5.9
A factory has a maximum load of 240 kW at 0.8 pf. lagging with an annual
consumption of 50,000 units. The tariff is Rs 50 per kVA of maximum demand plus
10 paise per unit. Calculate the flat rate of energy consumption. What will be the
annual saving if pf. is raised to unity?

Solution:

Maximum demand in kVA at a pf. of 0.8 = 240

0.8
= 300

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