Kandahar University
Engineering Faculty
Energy Engineering Department
Chapter 2
Utility Rate Structures
Lecturer: Senior T. A. Abdul Ghani Noori / Date : 2018 / 12 / 19
Eng. Ahmad Bilal Muhammadi
Objectives
Describing of how energy costs are determined.
Explaining of the various features of utility rate structures.
Describing of several clauses and charges in the energy billing
procedure.
Explaining of the importance of understanding electrical rate
structures in total energy cost in a typical facility.
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Table of Contents
I. Introduction
II. Electricity Rates
III. Common Features of Utility Rates
IV. Block Pricing Rates
V. Seasonal Pricing Rates
VI. Innovative Rates
VII. Natural Gas Rates
[Link]
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1. Introduction
Energy cost is an important part of the economic viability of several
energy conservation measures.
Therefore, it is crucial that an energy auditor or building manager
understand how energy costs are determined.
Generally, a considerable number of utility rate structures do exist
within the same geographical location.
Each utility rate structure may include several clauses and charges that
sometimes make following the energy billing procedure a complicated
task.
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2. Electricity Rates
To generate electricity, utilities have to consider several operating costs to
determine their rates.
Generation plant: The cost of operating the power plant to generate
electricity typically represents the highest cost category.
Transmission/distribution systems: To deliver the electricity from the
generation plant where it is produced to areas where it is utilized,
transmission lines, substations, and distribution networks have to be used.
Fuel costs: The electricity is generated using a primary fuel source
depending on the power plant.
Administrative costs: The salaries of management, technical, and office
staff and maintenance costs for power plant equipment are part of the
administrative costs.
5 Date : 2018 / 12 / 23
Cont.
Utilities allocate the cost of electricity differently by offering various rate
schedules depending on the type of customer.
Three customer types are generally considered by utilities: residential,
commercial, and industrial. Each utility may offer several rate structures
for each customer type.
It is therefore important that the auditor know the various rate structures
that can be offered to the audited facility. Some of the common rate
structures used by U.S. utilities are summarized below:
Block pricing rates
Seasonal pricing rates
Innovative rates
6 Date : 2018 / 12 / 23
3. Common Features of Utility Rates
There are several utility rate features and concepts that the auditor should
be familiar with to be able to interpret and analyze the utility billing
procedure correctly.
Billing Demand:
The demand that is billed by the utility is referred to as the billing demand.
The billing demand is often determined from the peak demand obtained
for one month (or any billing cycle).
To better understand the concept of billing demand, consider two different
monthly load profiles: a rugged profile A and a flat profile B as illustrated
in Figure.
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Cont.
It is further assumed that the average demand for profile A coincides
with that of profile B. It is not equitable for the utility to bill the same
charges for the two profiles.
Indeed, profile A requires that the utility supply higher demand and thus
increase its generation capacity for only a short period of time.
Meanwhile, profile B is ideal for the utility because it does not change
over time.
Therefore, some utilities charge their customers for the peak demand
incurred during the billing period.
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Cont. Power Factor Clause:
The power factor is defined as the ratio of actual power used by the
consumer to the total power supplied by the utility.
For the same actual power consumed by two customers but with different
power factor values, the utility has to supply higher total power to the
customer with the lower power factor.
To penalize customers for low power factors (generally lower than 0.85),
some utilities use a power factor clause.
9 Date : 2018 / 12 / 23
Cont. Example 2.1
A utility has the following monthly billing structure for its industrial
customers:
a) Customer charge = $450/month
b) Demand charge = $20/kW
c) Energy charge = $0.03/kWh
The power factor clause applies whenever the average monthly power
factor is less than 80 percent.
i. Calculate the utility bill for an industrial facility with the following
energy use characteristics during a specific month:
Actual demand: 300 kW
Energy consumption: 50,000 kWh
Average monthly power factor: 60 percent
ii. Determine the cost savings achieved for the month if the facility
power factor is improved to be always above 80 percent.
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Cont. Solution:
i. First, the billing demand for the month is determined using the power
factor clause because the average power factor is below 80 percent:
Billed demand = Actual demand * 80/pf = 300 * 80/60 = 400 kW Then,
the monthly bill can be calculated using the utility rate structure:
i. Customer charge = $ 450.00
ii. Demand charge = 400 kW * $20/kW = $ 8,000.00
iii. Energy charge = 50,000 kWh * $0.03/KWh = $ 1,500.00
Total monthly charges = (a) + (b) + (c) = $ 9,950.00
ii. The cost savings from improved power factor are due to a reduction in
the billing demand. Thus, a reduction of 100 kW in billing demand
which results in a reduction of demand charges of:
Cost Savings = 100 kW * $20/kW = $ 2,000/month
11 Date : 2018 / 12 / 23
Cont. Ratchet Clause
In ratchet clause the billed demand for any given month is a fraction of
the highest maximum demand of the previous 6 months (or 12 months)
or the actual demand incurred in the month.
Example 2.2 illustrates the calculation procedure of the utility bill with
a ratchet clause.
Example 2.2
The utility has added a ratchet clause to the rate structure described in
Example 2.1. Specifically, the ratchet clause states that no billing demand
shall be considered as less than the 70 percent of the highest on-peak
season maximum demand corrected for the power factor previously
determined during the 12 months ending with the current month.
Calculate the utility bill for the industrial facility considered in Example
2.1 taking into account the ratchet clause. Assume that the previous
highest demand (during the last 12 months) is 700 kW.
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Cont. Solution:
First, the minimum billing demand determined by the ratchet clause is
calculated:
Minimum billing demand (ratchet clause)
= 700 kW * 0.70 = 490 kW
Then, the monthly bill can be calculated using the utility rate structure:
a) Customer charge = $ 450.00
b) Demand charge = 490 kW * $20/kW = $9,800.00
c) Energy charge = 50,000 kWh * $0.03/KWh = $1,500.00
Total monthly charges = (a) + (b) + (c) = $ 11,750.00
Thus, the ratchet clause increases the utility bill for the month.
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Cont. Fuel Cost Adjustment
Most utilities have to purchase primary energy sources (fuel oil, natural
gas, and coal) to generate electricity.
Inasmuch as the cost of these commodities changes over time, the
utilities impose an adjustment to their energy charges to account for any
cost variation of their primary energy sources.
In addition to fuel cost adjustment, utilities may levy taxes and
surcharges to recover imposts required from them by federal or state
governments or agencies.
Example 2.3 illustrates the effect of both the fuel cost adjustment and
sales tax on a monthly utility bill.
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Cont. Example 2.3
Calculate the utility bill for the industrial facility considered in Example 2.2
taking into account both a fuel cost adjustment of 0.015/kWh and a sales tax
of 7 percent.
Solution:
The fuel cost adjustment should be applied to the energy use, and the sales tax
should be applied to the total cost. Thus, the monthly bill for the industrial
facility considered in Example 2.2 becomes:
a) Customer charge = $ 450.00
b) Demand charge = 490 kW * $20/kW = $9,800.00
c) Energy charge = 50,000 kWh * [$0.03/kWh + $0.015/kW] =
$2,250.00
Total monthly charges (before sales tax) = (a) + (b) + (c) = $12,500.00
Total monthly charges (after sales tax) = $12,500.00 * 1.07 = $13,375.00
The cumulative effect of both fuel cost adjustment and sales tax increased the
utility bill for the month by [$13,375 – $11,750 = $1,625].
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Cont. Service Level
Utilities typically offer several rate structures for a given customer
depending on the type of service.
For instance, utilities may have different rates depending on the voltage
level provided to the customers.
The higher the delivery voltage level, the cheaper the energy rate is. In
particular, utilities offer reduced rates for demand or energy charges to
customers that own their service transformers.
Example 2.4
The industrial facility of Example 2.1 has an option of owning and
operating its own service transformer with the advantage of reduced rate
structure as described below:
Customer charge = $650/month
Demand charge = $15/kW
Energy charge = $0.025/kWh
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Cont. Solution:
First, the utility bill is determined in the case where the facility owns its
service transformer:
a) Customer charge = $ 650.00
b) Demand charge = 400 kW * $15/kW = $ 6,000.00
c) Energy charge = 50,000 kWh * $0.025/KWh = $ 1,250.00
Total monthly charges = (a) + (b) + (c) = $ 7,900.00
Thus, the savings in the utility bill for the month is
Utility bill savings = $9,950 – $7,900 = $2,050
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4. Block Pricing Rates
In these rates, the energy price depends on the rate of electricity
consumption using either inverted or descending blocks.
An inverted block pricing rate structure increases the energy price as the
consumption increases.
On the other hand, a descending block rate structure reduces the price as
the energy consumption increases.
Typically, the rate is referred to as a “flat” rate when the energy price
does not vary with the consumption level.
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Cont.
19 Date : 2018 / 12 / 23
Cont.
20
Cont. Example 2.5
Using utility rate structure A, calculate the utility bill for a residence
during a summer month when the energy use is 800 kWh.
Solution:
Considering all the charges imposed by utility rate A (see Table 2.12),
the monthly bill can be calculated as follows:
a) Customer charge = $ 7.50
b) Energy charge = 400kWh * $0.0874/kWh + 400kWh *
$0.1209/kWh = $83.32
c) Fuel cost adjustment = $ 0.00
d) Taxes = 6.544 percent [(a) + (b) + (c)] = $ 5.94
Total monthly charges = (a) + (b) + (c) + (d) = $96.76
Thus, the average cost of electricity for the month is $96.76/800
21 kWh = $0.12095/kWh. Date : 2018 / 12 / 23
5. Seasonal Pricing Rates
Some electric utilities offer seasonal rate structures to reflect the monthly
variations in their generation capacity and energy cost differences.
Generally, the utilities that provide seasonal rate structures use different
energy or demand charges during winter and summer months.
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Cont. Example 2.6
Using utility rate structure B, calculate the utility bill for a commercial facility
during a winter month when the energy use is 70,000 kWh, the billing demand is
400 kW, and the average reactive demand is 150 kVAR.
Solution:
Accounting for all the charges considered by utility rate B (see Table 2.13), the
electric energy bill for the winter month can be calculated as follows:
a) Customer charge = $ 0.00
b) Energy charge = 40,000 kWh * $0.059/kWh
+ 30,000 kWh * $0.042/kWh = $3,620.00
c) Demand charge = 50 kW * $12.39/kW + 350 kW * $11.29/kW =
$4,571.00
d) Fuel cost adjustments = 70,000 kWh * $0.01605 = $1,123.50
e) Reactive demand charge = 150 kVAR * $0.20/kVAR = $ 30.00
f) Taxes = $ 0.00
Total monthly charges = (a) + (b) + (c) + (d) + (e) + (f) = $9,344.50
The average cost of electricity for the month is then $9,344.50/70,000 kWh or
$.1335/kWh.
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6. Innovative Rates
Due to the increased focus on integrated resource planning, demand-side
management, and the competitive energy market, several innovative rates
have been implemented by utilities.
These innovative rates have the main objective to profitably meet
customer needs. In the United States, innovative rates can be classified
into seven categories.
1. Time-of-Use (TOU) Rates
2. Real-Time-Pricing (RTP) Rates
3. The End-Use Rates
4. Specialty Rates
5. Financial Incentive Rates
6. Nonfirm Rates
24 7. Energy Purchase Rates Date : 2018 / 12 / 23
7. Natural Gas Rates
The rate structures for natural gas are similar to those described for
electricity.
However, the rates are generally easier to understand and apply. For
instance, natural gas utilities rarely charge for peak demands.
However, energy charges using block rates or seasonal rates are commonly
offered.
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Cont.
26 Date : 2018 / 12 / 23
Cont. Example 2.7
Using utility rate structure D, calculate the gas utility bill for a residence
during a month when the energy use is 10.4 MMBtu.
Solution:
Considering all the charges imposed by utility rate D, the monthly gas bill
can be calculated as shown below:
a) Customer charge = $ 4.50
b) Energy charge = 2.5 MMBtu * $5.145/MMBtu + 7.9 MMBtu *
$4.033/MMBtu = $44.72
c) Fuel cost adjustment = $ 0.00
d) Taxes = 4.00 percent [(a) + (b) + (c)] = $ 8.05
Total monthly charges = (a) + (b) + (c) + (d) = $57.27
Thus, the average gas cost for the month is $57.27/10.4 MMBtu
27 or 5.51/MMBtu. Date : 2018 / 12 / 23
8. Assignment
Solve the problems
Any
Question ?
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