An electricity bill consists of the cost of generating, transmitting and distributing electricity. Administrative and other costs that the electrical companies incur are also included. Understanding an electricity bill can help consumers use energy more efficiently and reduce costs. So, how to understand an electricity bill? Let’s start by breaking it down into each individual component.
Components of an electricity bill
A typical electricity bill begins with a fixed cost. To that, variable charges based on the amount of electricity used, are added. Costs are determined by factors like time of day energy is used and home insulation. Additional charges may be added due to delayed payments or early termination of contracts.
This covers a fixed fee charged by the electrical distributor, meter rent, and meter reading costs. The fixed charge does not depend on the amount of energy used. This figure is the same for all consumers under the same supply contract or tariff. It is sometimes referred to as “the service to property” or “daily supply charge”.
The fixed charge may be specified on a daily basis or as a single figure covering the entire billing period. These costs are constant regardless of usage and there is little a customer can do to reduce this.
This is also referred to as a consumption charge and is based on the amount of electricity a customer uses during the billing period.
It is usually charged per kilowatt hour.
The total variable rate charge equals the cost per unit times the number of units used during the billing period.The energy in kilowatts depends on the size of the total load. It’s influenced by the size of the electrical appliances and the time the equipment remains powered on.
A customer who understands the variables that affect their electric bill is in a better position to adjust usage and decrease costs. For example, the consumer may opt to heat water during the times when the demand is low and electricity charges are lower. In addition, the consumer can choose the best plan or tariff that provides the most savings.
It is important to note that the cost of electricity fluctuates several times during the day due to changes in fuel prices, exchange rates, demand and other factors. However, these changes are usually not specified in the bill. Instead, the electric company uses an average rate for the particular billing period.
Other charges and fees
Other than the standard and regular fixed and variable charges, the electricity company may add the following fees and penalties:
- Late payment fee
- Disconnection and reconnection charges – applicable after a consumer clears an outstanding bill.
- Payment processing fee for consumers paying bills using credit cards.
Why some bills are higher than normal
An electricity bill may appear higher than normal due to one or more factors. Variables that affect the overall amount include high usage of heating or cooling systems, extra guests or unpaid previous bills. Other factors include an increase in electricity costs or seasonal changes in weather.
There are times when the utility company cannot read the meters, especially when the meters are inaccessible or faulty. The distributor guesses the usage based on a reading taken for the same period the previous year or usage from a similar customer. Estimated bills are usually specified as E or other terms used by the provider.
These estimates can cause a problem when a consumer is undercharged for a long period and then the bill is corrected after several months.
Common electricity billing structures
The electricity distribution companies use a variety of rate structures which vary from one region to another. Some consumers may combine different tariffs or rate structures to take advantage of the low rates applicable during the off-peak hours. This is made possible by using one, or a combination of the following rate structures:
- Fixed rate: The cost of the electricity remains the same throughout the entire contract period. The rate per kilowatt hour is constant throughout this period, which is usually two years. However, variations occur if there are price changes in meter rent, line fees, sales tax or other incidental charges. Consumers are sometimes required to pay an exit fee if they terminate the contract early.
- Based on the amount consumed: The amount charged varies according to the tariff or plan. In some of the plans, the first few kilowatts are charged at the lowest rate. The units above this first block are then charged at a higher rate. There are other plans where the first block is charged at a higher rate and the units above the threshold charged at lower rates.
- Time of use: Some electric companies have tariffs or plans with different charges based on the time of use, season, or holiday. The cost per unit then varies according to the time a consumer used the energy. Some metering systems record the amount of electricity a customer uses during the day, during the night or on holiday.
The charges are lower during the night, holidays and weekends when the demand is low. The utility company charges off-peak rates throughout these periods. Consumers, can therefore, take advantage of these and heat water during the night.
The seasonal charges vary according to the weather. Typically, higher rates occur during winter and summer when consumers use more energy for heating and cooling.
When consumption is high, power companies spend more money on fuel to produce the extra power. These price hikes are passed on to the consumer.