Electricity Tariff: Objective, Characteristics, and Types

Electricity Tariff Objective, Characteristics, and Types

Objectives of Electricity Tariff

Electrical energy is also sold at such a rate as other commodities. So, it does not only return the cost. But also earns a reasonable profit. Therefore, a  Electricity Tariff should include the following items:

  • Recovery of the cost of producing electrical energy at the power station.
  • Recovery of the cost of the capital investment in transmission and distribution system.
  • A suitable profit on capital investment.
  • Recovery of operation and maintenance of a supply of electrical energy e.g., metering equipment (Energy Meter), billing, etc.

Desirable Characteristics of a Tariff

A tariff has the following desirable characteristics,

  • Proper return

The Electricity Tariff should ensure the proper return from each consumer. The total receipts from the consumers must be equal to the cost of producing and supplying electrical energy and a reasonable profit. To ensure continuous and reliable service to the consumers, Proper return of utility company is necessary.

  • Fairness

The tariff must be fair so that different types of consumers are satisfied with the rate of change of electrical energy.

  • Simplicity

The tariff schemes must simple to understand. Hence, an ordinary consumer can easily understand and obey it properly. A complicated tariff may cause opposition from the public which generally distrustful of supply from the ideal.

  • Reasonable Profit

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

  • Attractive

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

Types of Electricity Tariff

Simple Tariff (Straight Line Tariff)

When there is a fixed rate per unit of energy consumed, it is called a simple tariff of uniform rate tariff or straight-line tariff.

In this type of tariff, the price charged per unit is constant i.e., it does not vary with an increase or decrease in the number of units consumed. This is the simplest of all tariffs and is readily understood by the consumer.

Flat Rate Tariff

The Flat Rate Tariff is defined as the different types of consumers are charged at different uniform per unit rates.

The consumers are grouped into different classes. And the consumer of a different class is charged at a different uniform rate. The flat rate per kWh for lighting load maybe 60 paise for an instant. Whereas it may be slightly less for power load (say 55 paise per kWh).

Block Rate Tariff

When a given block of energy is charged at a specified rate, the Block Rate tariff is defined as the succeeding blocks of energy are charged at progressively reduced rates.

In this type of tariff, the energy consumption is divided into blocks and the price per unit is fixed in each block. The highest price per block is on the first block. It is reduced for the succeeding blocks of energy.

Let’s understand with an 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. The remaining additional units will be charged at the rate of 30 paise per unit.

The advantage of this type of tariff is that the consumer gets motivated to consume more electrical energy. This type of tariff is used for residential and small commercial consumers.

Two-part Tariff

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

In a two-part tariff, the total charge to be made from the consumers is split into two components viz., fixed charges, and running charges.

The maximum demand depends on the fixed charges and the running charges depend upon the number of units consumed by the consumers.

Hence, the consumer 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 x kW + c x kWh)


b = charge per kW of maximum demand

C = charge per kWh of energy consumed

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

Maximum Demand Tariff

The only difference is between the maximum demand tariff and two-part tariff is that the maximum demand is measured by installing maximum demand meter in the premises of the consumer.

It is not suitable for a small consumer-like residential consumer, as a separate maximum demand meter is required. However, this type of tariff applied to big consumers.

Power Factor Tariff

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

kVA Maximum Demand Tariff

It is a modified form of a two-part tariff. In this case, the fixed charge is made based on maximum demand in kVA and not in kW. KVA is inversely proportional to the power factor.

Therefore, a consumer having a low power factor has to contribute more towards the fixed charge.

Sliding Scale Tariff

The sliding scale tariff is also known as the average power factor tariff. In this case, say 0.8 lagging power factor is assumed as an average power factor and it is taken as reference.

If the power factor of the consumers falls below this factor, additional charges are made. If the power factor is above the reference, a discount is allowed to the consumer.

kW and kVAR tariff

In this type, both active power and reactive power supplied are charged separately. A consumer having a low power factor will draw more reactive power and hence shall pay more charge.

Three-part Tariff

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

i.e., Total charge = Rs (a + b x kW + c x kWh)


a = fixed charge made during each billing period

It includes interest and depreciation on the cost of secondary distribution and labor cost of collecting revenues.

b = charge per kW of maximum demand

c = charge per kWh of energy consumed

This type of tariff is applied to big consumers.

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