What is Electricity Tariff?

Electricity Tariff

The electricity tariff is defined as the rate at which the electrical energy is sold to a consumer.

However, the tariff should include the total cost of producing and supplying electrical energy plus the profit to the power company. In practice, the tariff cannot be same for all types of consumers because the cost of production of electrical energy depends upon the magnitude of electrical energy consumed by the user and his load conditions. Therefore, the tariff is fixed by considering the different types of consumers such as domestic, industrial and commercial, etc.

Objective of Tariff

Like any other product, the electrical energy is also sold at such a rate so that it not only returns cost of production and transmission but also earns reasonable profit. Hence, a tariff should include the following factors −

• It should recover the cost of production of electrical energy at the power station.

• It should recover the cost on the investment in transmission and distribution of electrical energy.

• It should recover the cost of operation and maintenance of elements of power system such as meters, equipment, bills, etc.

• It should also generate a profit on the investment.

Desirable Characteristics of Tariff

The following are the desirable characteristics of an electricity tariff −

• Proper Return - The tariff should be such that the total receipts from the consumers must be equal to the cost of producing and supplying electrical energy plus reasonable profit. Therefore, the tariff should be such that it ensures the proper return from each consumer so that each power supply company can ensure the continuous and reliable service to the consumers.

• Simplicity - The tariff should be simple so that it can easily be understood by an ordinary consumer.

• Fairness - The tariff should be fair so that different types of consumers are satisfied with the rate of charge of electrical energy. Therefore, a big consumer should be charged at a lower rate than a small consumer because the increased energy consumption spreads the fixed charges over a greater number of units, which reduces the overall cost of production of electrical energy. Similarly, the consumers whose load conditions are non-variable should be charged at lower rate than the consumers whose load conditions change considerably from the ideal.

• Attractive - The tariff should be attractive so that a large number of consumers are encouraged to utilise the electrical energy.

• Reasonable Profit - The tariff should be such that it also earns a reasonable profit.

Types of Electricity Tariff

The various types of electricity tariff are defined as follows −

• Simple Tariff - When there is a constant rate per unit of electrical energy consumed, then it is called the simple tariff or uniform rate tariff.

• Flat Rate Tariff - When different types of consumers are charged at different fixed rate per unit of electrical energy consumed, then it is called the flat rate tariff.

• Block Rate Tariff - When a given block of electrical energy is charged at a specified rate and the succeeding blocks of electrical energy are charged at progressively reduced rates, then it is called the block rate tariff.

• Two-Part Tariff - When the rate of electrical energy is charged on the basis of maximum demand and the units consumed, then it is called the two-part tariff.

• Maximum Demand Tariff - When the rate of electrical energy is charged on the basis of maximum demand, then it is called maximum demand tariff. The maximum demand tariff is similar to the two-part tariff with the only difference that the maximum demand of the consumer is measured by installing maximum demand meter in the consumer's premises.

• Power Factor Tariff - When the rate of electrical energy is charged on the basis of power factor of the consumer's load, it is called the power factor tariff.

• Three-Part Tariff - When the total charges made from the consumers are split into three parts namely, fixed charges, semi-fixed charges and running charges, then it is called the three-part tariff.