Forms of tariff with merits and demerits

Tariff is the rate (schedule of charges) at which electrical energy is sold to a consumer. It must recover the fixed cost, the running cost and a reasonable profit. It should also be simple and fair, and should encourage good use of the plant.

1. Simple (flat rate per unit) tariff

A fixed rate per kWh, e.g. Rs 10/kWh, for all units.

• Merits: simple to understand and bill.
• Demerits: does not separate fixed and running costs; small and large consumers pay the same rate; no incentive for a high load factor.

2. Flat rate tariff

Different per-unit rates for different types of consumers (lighting, power).

• Merits: fairer than the simple tariff between consumer classes.
• Demerits: needs separate meters and wiring for each class; the rate is fixed for a class whatever the consumption.

3. Block rate tariff

Energy is divided into blocks, with a different rate for each block (the rate falls for later blocks, or rises, as in Nepal's domestic tariff).

• Merits: large consumers get a lower average rate (declining block); a rising block (as used by NEA) protects poor users and discourages waste.
• Demerits: takes no account of maximum demand or time of use.

4. Two-part tariff

Bill = a × kW (or kVA) maximum demand + b × kWh.

• Merits: fixed cost is recovered from the demand charge and running cost from the energy charge; fair; suits industries.
• Demerits: the maximum demand is often assessed (estimated) rather than measured, which is hard to do fairly; the consumer pays the fixed part even when little energy is used.

5. Maximum demand tariff

Like the two-part tariff, but the maximum demand is actually measured by an MD meter.

• Merits: removes the objection to an assessed demand.
• Demerits: costly metering; suitable only for big consumers.

6. Power factor tariff

Charges depend on pf: kVA maximum demand tariff, sliding scale tariff, or kW and kVAR tariff.

• Merits: penalises low pf, encourages pf correction, reduces plant size.
• Demerits: extra metering; complex.

7. Three-part tariff

Bill = a (fixed per consumer) + b × kW + c × kWh.

• Merits: recovers customer, demand and energy costs separately; the most scientific form.
• Demerits: complicated for ordinary consumers; used only for big consumers.

8. Time of day (TOD) tariff

Different energy rates for peak, normal and off-peak periods.

• Merits: shifts load to off-peak hours and improves load factor; a DSM tool.
• Demerits: needs TOD meters; may be inconvenient for consumers.