• Introduction

    The electrical energy produced at the generating station is delivered to variety of consumers. The rate at which energy is sold to the consumers is fixed by the supplying company. While fixing the rate, the supply companies are to ensure that tariff should be such as it cover total cost of generating and supplying electrical energy plus a reasonable profit. However, the profit should be minimum so that electrical energy can be sold at reasonable rates and the consumers insured to use more electricity.

    The tariff is the rate at which the electrical energy is sold to the consumer.


    The following factors are taken into account to decide the tariff:

    a. Types of load (domestic, commercial, industrial, etc.)

    b. Maximum demand

    c. Time at which load is required

    d. Power factor of the load

    e. Amount of energy used


    Objectives of tariff:

    As stated above, electrical energy is sold at such a rate so that it not only returns the cost but also earns reasonable profit. Therefore, a tariff should include the following items:

    1. Recovery of cost of electrical energy generated at the generating system.

    2. Recovery of cost on the capital investment in transmission and distribution system.

    3. Recovery of cost of operation, supplies and maintenance of equipment.

    4. Recovery of cost of metering equipment, billing and miscellaneous services.

    5. A marginal return (Profit) on the capital investment.


    Desirable Characteristics of a Tariff

    A tariff must have the following desirable characteristics:

    1. Proper return: The tariff should be such that it ensures the proper return from each consumer. In other words, 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.


    2. Fairness: The tariff must be fair so that different types of consumers are satisfied with the rate of charge of electrical energy. Thus a big consumer should be charged at a lower rate than a small consumer. It is because increased energy consumption spreads the fixed charges over a greater number of units, thus reducing the overall cost of producing electrical energy. Similarly, a consumer whose load conditions do not deviate much from the ideal (i.e., nonvariable) should be charged at a lower rate than the one whose load conditions change appreciably from the ideal.


    3. 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.


    4. 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. Therefore, the investment is relatively safe due to non-competition in the market. This calls for the profit to be restricted to 8% or so per annum.


    5. 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 Tariff

    There are several types of tariff. However, the following are the commonly used types of tariff:


    1. General tariff form

    Quite a large number of tariffs have been proposed from time to time and are in use. They are all derived from the following equation:

    Total amount of bill for a certain period (T) = α + β.x + γ.y


          x = maximum kW or kVA demand during the period

          y = total energy consumed during the period (kWh)

          α = fixed charge during each billing period

          β = cost per kW or per kVA of maximum demand

          γ = cost per kWh of energy consumed


    Thus, the total bill of the customer has three parts, namely, fixed charged, semi- fixed charged and running charge.


    2. Flat demand rate tariff

    In flat demand rate tariff, consumers are charged on the basis of number of lamps installed or total load connected in kW. So, the rate could be expressed directly as a price per lamp or per unit of load installed. If x is the no. of lamps or total load connected in kW and β is the rate per lamp or per kW connected load then, T = βx.

    Here the bill depends only on the kW demand and independent from the energy consumed. This tariff system is used in street lighting, sign lighting, signal system, and tube well irrigation system. In Flat demand rate tariff, the amount of connected load known and the rate of charge is made accordingly. Note that hours of their use doesn't require and thus, metering is not required in this system of the tariff. Since metering equipment and meter reading are not required, hence resulting in overall cost reduction.


    3. Straight meter rate tariff or Simple tariff

    When there is a fixed rate per unit of energy consumed, it is called a simple tariff or uniform rate tariff. Total amount of bill for a certain period (T) can be represented by the equation

    T = γ.y

    In this type of tariff, the price charged per unit is constant i.e., it does not vary with increase or decrease in number of units consumed. The consumption of electrical energy at the consumer’s terminals is recorded by means of an energy meter. This is the simplest of all tariffs and is readily understood by the consumers. The main disadvantage of this tariff is that a customers who does not use energy has zero bill though he has caused the utility to incur a definite expenditure due to its readiness to serve him. It does not encourage the customer to use more power in case of surplus power or to reduce power consumption in case of power shortage.


    4. 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.

    In 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.

    The advantage of such a tariff is that 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. However, its principal defect is that it lacks a measure of the consumer’s demand. This type of tariff is being used for majority of residential and small commercial consumers.


    5. 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., semi-fixed charges and running charges. The semi-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 (β × kW + γ × kWh)

     where,  β = charge per kW of maximum demand

             γ = charge per kWh of energy consumed


    This type of tariff is mostly applicable to industrial consumers who have appreciable maximum demand.



    1. It is easily understood by the consumers.

    2. It recovers the fixed charges which depend upon the maximum demand of the consumer but are independent of the units consumed.



    1. The consumer has to pay the fixed charges irrespective of the fact whether he has consumed or not consumed the electrical energy.

    2. There is always error in assessing the maximum demand of the consumer.


    6. Power factor tariff

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

    In an a.c. system, power factor plays an important role. A low power factor increases the rating of station equipment and line losses, S = VI*, P = I2R and I = P/(V cosθ). Therefore, a consumer having low power factor must be penalized. The following are the important types of power factor tariff:

    A. 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. As kVA is inversely proportional to power factor, therefore, a consumer having low power factor has to contribute more towards the fixed charges. This type of tariff has the advantage that it encourages the consumers to operate their appliances and machinery at improved power factor.


    B. 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. On the other hand, if the power factor is above the reference, a discount is allowed to the consumer.


    C. kW and kVAR tariff : In this type, both active power (kW) and reactive power (kVAR) supplied are charged separately. A consumer having low power factor will draw more reactive power and hence shall have to pay more charges.


    7. 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. i.e.,

    Total charge = Rs (α + β × kW + γ × kWh)

    where α = fixed charge made during each billing period. It includes interest and depreciation on the cost of secondary distribution and labour cost of collecting revenues,

    β = charge per kW of maximum demand,

    γ = charge per kWh of energy consumed.


    It may be seen that by adding fixed charge or consumer’s charge (i.e., a) 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.