Energy tariffs and energy rates may seem similar, but they are actually quite different, and understanding them can help you save money. This article explains what energy tariffs are, how they are calculated, and what they mean for your electricity or gas bills. Whether you’re a residential or commercial customer in a regulated or deregulated energy market, tariffs play a key role in determining your total energy costs. By understanding energy tariffs, you can make smarter decisions and potentially reduce your utility expenses.
What Is an Energy Tariff?
An energy tariff is a document issued by a utility provider that details how they bill customers for electricity or natural gas. It describes the rates, calculations, and invoicing procedures that define your energy charges. Utilities typically offer various rates for residential and commercial users. In each category, there can be multiple variations based on factors like usage, peak times, or type of service. Grasping your energy tariff is essential for controlling expenses and identifying chances to save.
How to Understand Your Tariff?
- Check Your Bill: Find the detailed rate breakdown.
- Identify Your Rate Schedule: See if you’re on a simple, TOU, or tiered plan.
- Review Utility Websites: Your provider posts tariff schedules and rate info.
- Consider Your Usage: If you use more power at night, a TOU plan might save you money; if you use a lot overall, a tiered plan’s higher tiers could cost more.
Why Is an Energy Tariff Important?
An energy tariff determines how much your business pays for electricity or gas. It directly affects your utility bills and overall energy costs. Choosing the right tariff can save your business thousands of dollars per year and improve financial planning.
Tariffs also influence:
- Predictability of Costs: Fixed tariffs provide stable, predictable bills, while variable or time-of-use tariffs may fluctuate with market prices.
- Energy Usage Strategy: Certain tariffs, like time-of-use or hourly rates, encourage shifting energy use to off-peak hours, helping reduce costs.
- Eligibility for Savings: Some tariffs, like primary power or large usage plans, reward businesses that meet specific energy usage or equipment requirements.
Understanding your tariff is essential for making informed decisions about energy procurement. Without knowing your tariff and eligibility, you could be overpaying for energy or missing out on potential savings.
Energy Rates vs. Tariffs: Are They Different?
Energy rates and tariffs are related, but they are not the same.
- Energy rates are the actual dollar amounts you pay for each unit of electricity or natural gas you use.
- Energy tariffs are the documents or rules set by the utility that define how those rates are applied. Tariffs explain which customers pay which rates, when they apply, and under what conditions.
Understanding the difference helps you make sense of your energy bill and can reveal opportunities to reduce costs.
Energy Rates
Energy rates are usually made up of two main parts: distribution charges and supply charges.
- Supply charges are what you pay for the actual electricity or gas you use, usually listed as a rate per kilowatt-hour (kWh) for electricity or per CCF for natural gas.
- Distribution (or demand) charges are what you pay to the utility for delivering energy to your location, often shown as a rate per kilowatt (kW).
In short, energy rates are the total dollar amount you pay based on these charges. Energy tariffs, on the other hand, define the rules for how these rates are calculated and applied.
Energy Tariffs
Energy tariffs are published by utility companies and define how energy rates are calculated for both distribution and supply. For example, an energy tariff might define the following for a commercial customer on a time-of-use tariff schedule:
- On-Peak Distribution Rates: $15/kW for the first 100 kW
- On-Peak Distribution Rates: $10/kW for amounts over 100 kW
- Off-Peak Distribution Rates: $5/kW
Energy tariffs determine the total energy rate a customer will pay for specific periods of time and for specific volumes.
Types of Energy Tariffs
Energy tariffs vary widely across the U.S., depending on the utility market and state regulations. Each utility company sets its own tariff schedules, influenced by factors like the local energy supply mix, wholesale energy costs, and state utility board rules. Understanding the types of tariffs available can help businesses choose the most cost-effective plan.
Time of Use (TOU) Tariffs
Time of Use tariffs, also called on-peak and off-peak rates, charge different prices depending on the time of day. Energy used during peak hours costs more, while off-peak energy costs less. These schedules encourage businesses to shift energy use to off-peak times, reducing overall electricity costs. TOU tariffs are common in regulated states like California and Nevada.
Hourly or Real-Time Tariffs
Hourly tariffs charge based on the actual price of energy for each hour multiplied by usage. These are mostly used by large commercial and industrial customers and are found in both regulated and deregulated markets. Hourly tariffs allow businesses to take advantage of lower-cost periods but require active monitoring and energy management.
Fixed Tariffs
Fixed tariffs charge a set rate for each unit of energy, making energy costs predictable for the billing period. They are available in both regulated and deregulated markets. While the rate is fixed for the period, utilities may update it periodically (quarterly, semi-annually, or annually). Fixed tariffs provide stability and budgeting ease for businesses.
Variable Tariffs
Variable tariffs change with the wholesale energy market. The rate per unit of energy can rise or fall monthly based on market settlement prices. These tariffs exist in both regulated and deregulated markets. They offer potential savings when market prices drop but can also increase costs if energy prices rise.
Related Blog:
What Are The Differences Between Regulated and Deregulated Energy?
Primary Power Tariffs
Primary power tariffs apply to commercial and industrial customers who own and maintain their own power transformers. Owning a transformer allows businesses to access lower distribution rates compared to secondary power. This can result in significant savings for large energy users.
Secondary Power Tariffs
Secondary power tariffs cover commercial customers whose electricity is delivered via a utility-owned transformer. These tariffs calculate the distribution portion of electricity costs. Secondary power is common because most utilities manage transformers for their commercial clients.
Additional Tariff Types
Beyond the main categories, there are several specialized tariffs that businesses may encounter:
- Simple / Flat Rate: A straightforward per-unit energy rate.
- Large or Small General Usage: Tariffs for businesses with high or low energy needs.
- 3-Part / Maximum Demand: Charges based on usage, demand, and fixed fees.
- Block Rate: Different rates apply to different levels of energy usage.
- Power Factor Tariffs: Rates based on the efficiency of energy use.
- Economy 7 / Economy 10: Off-peak night-time energy pricing.
- Green Tariffs: Renewable energy options.
- Dual Fuel: Combined gas and electricity tariff plans.
Understanding which tariff your business qualifies for and which will save the most money can be complex. Utility companies often have eligibility requirements, such as minimum energy usage thresholds. Working with an energy broker can help businesses navigate these options and ensure they are on the most cost-effective tariff.
Related Blog:
Differences Between Energy Brokers and Energy Consultants: Which One Do You Need?
What Tariff Do You Qualify For?
Knowing which energy tariff your business qualifies for is essential. It determines your options and how much you will pay for energy. Choosing the right tariff can reduce utility costs and improve profitability. Each type of tariff is fixed variable, time-of-use, primary, secondary, or hourly can have multiple variations with specific eligibility requirements.
For example:
- Large General Usage Tariffs: You might qualify if your business uses over 500,000 kWh per year and has a monthly demand above 100 kW.
- Primary Power Tariffs: Some tariffs require that you own and maintain your own power transformers to access lower rates. Falling below the usage or demand threshold even for a single month can disqualify you.
- Industry-Specific Tariffs: Certain tariffs consider your energy mix. For instance, if a manufacturer uses 30% natural gas and 70% electricity for heating, they may qualify for a specific tariff designed for that usage profile.
Across most markets, there can be dozens of tariff variations, with around 75 different qualifications commonly observed. This makes it critical to analyze your business’s energy usage and consult with an energy expert to ensure you’re on the most cost-effective tariff.
Choosing the Right Tariff
Not all customers can pick their utility tariff. Residential customers usually have to stick with the standard residential plan. In some states, small commercial customers are also limited to their assigned tariff. However, many commercial and industrial customers have options to choose a tariff that fits their energy needs. Keep in mind, not every tariff is available to every customer. Utilities often require a certain level of energy usage to qualify for specific plans.
Working with an energy consultant or broker can be very helpful. They can analyze your energy bills, check eligibility, and even find a cheaper tariff that could save your business money. A professional energy broker can help you navigate complex tariff schedules and make the best choice for your business.
Tariff Savings Example
In the First Energy territory in Pennsylvania, commercial and industrial customers can choose between primary and secondary power tariffs. Most new customers are placed on the secondary tariff, but those who meet certain energy usage requirements can qualify for the primary tariff.
Primary power can be up to 50% cheaper than secondary power distribution rates. For example, a customer paying $10,000 per month in electric delivery costs could save as much as $60,000 per year by switching to a primary power tariff.
Looking for a Tariff Analysis?
Understanding energy tariffs is key to managing your business energy costs. Tariffs change often, so staying updated and ensuring your business is on the right plan can save you thousands of dollars each year. Our team of expert energy advisors can review your energy usage and local utility tariffs to help you maximize savings. Contact us today to get started!