What is Electricity tariff?

An electricity tariff refers to the monetary compensation established by the supplier for the provision of electrical energy to diverse categories of consumers. Stated differently, a tariff refers to the mechanism utilized to bill a consumer for their electricity consumption. The tariff encompasses the entire expenditure involved in the production and distribution of electrical energy, along with a justifiable expense.

Electricity tariff
Electricity tariff


Tariff means the schedule of rates or charges. The rate at which electrical energy is supplied to a consumer is known as tariff. Although tariff should include the total cost of producing and supplying electrical energy plus the profit but it cannot be same for all the types of consumers. Tariff is different for (industrial, domestics and commercial) users depending upon the magnitude of electrical energy consumed by the user and his load conditions.

Objectives of Electricity Tariff

Electrical energy is also sold at such a rate so that it not only returns the cost but also earns reasonable profit. Tariff should include the following items:

  • It should recover the cost of producing electrical energy at the power station.
  • It should recover cost on the capital investment in transmission and distribution systems.
  • It should recover the cost of operation and maintenance of supply of electrical energy such as metering equipment, billing etc.
  • It should have the suitable profit on the capital investment.

Desirable characteristics of a Electricity Tariff

  1. Proper return: The tariff should be such that it ensures the proper return from each consumer. The total receipts from the consumers must be equal to the cost of producing and supplying electrical energy plus reasonable profit. This will enable the electric supply company to ensure continuous and reliable service to the consumers.
  2. Fairness: The tariff must be fair so that different types of consumers are satisfied with the rate of charge of electrical energy. Thus a big consumer should be charged at a lower rate than a small consumer. It is because increased energy consumption spreads the fixed charges over a greater number of units, thus reducing the overall cost of producing electrical energy.
  3. Simplicity: The tariff should be simple so that an ordinary consumer can easily understand it.
  4. Reasonable profit: The profit element in the tariff should be reasonable. An electric supply company is a public utility company and generally enjoys the benefits of monopoly. Therefore, the investment is relatively safe due to non-competition in the market. This calls for the profit to be restricted to 8% or so per annum.
  5. Attractive: The tariff should be attractive so that a large number of consumers are encouraged to use electrical energy.

Types of Electricity Tariffs

Simple tariff

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

In this type of tariff, the price charged per unit is constant i.e. it does not vary with increase or decrease in number of units consumed. The consumption of electrical energy at the consumers terminals is recorded by means of an energy meter. This is the simplest of all tariffs and is readily understood by the consumers.


  • There is no discrimination between different types of consumers since every consumer has to pay equitably for the fixed charges.
  • The cost per unit delivered is high.
  • It doesn’t encourage the use of electricity.

Flat rate tariff

When different types of consumers are charged at different uniform per unit rates ,it is called a flat rate tariff.

In this type of tariff, the consumers are grouped into different classes and each class of consumers is charged at a different uniform rate. For instance, the flat rate per kWh for lighting load may be 60 paisa, whereas it may be slightly less (say 55 paisa per kWh) for power load. The different classes of consumers are made taking into account their diversity and load factors. The advantages of such tariff is that it is more fair to different types of consumers and is quite simple in calculations.


x units =energy consumption during the billing period

a units=flat rate Rs a per unit


  • Since the flat rate tariff varies according to the way the supply is used, separate meters are required for lightning load ,power load etc. This makes the application of such a tariff expensive and complicated.
  • A particular class of consumers is charged at the same rate irrespective of the magnitude of energy consumed. However, a big consumer should be charged at a lower rate as in his case the fixed charges per unit are reduced.
  • Load factor and diversity factor for various types of loads to be employed in deciding the tariff is difficult to experienced.

Block rate tariff

When  a given block of energy is charged at a specified rate and the succeeding blocks of energy are charged at progressively reduced rates it is called block rate tariff.

In block rate tariff, the energy consumption is divided into blocks and the price per units is fixed in each blocks. The price per unit in the first block is the highest and it is progressive reduced for the succeeding blocks of energy.

For 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 per unit.
  • and the remaining additional units may be charged at the rate of 30 paise per unit.


  • The consumers gets an incentive to consumer on electrical energy.
  • This increases the load factor of the system and hence the cost of generation is reduced.


  • Lacks  a measure of the consumer’s demand.


  • Used in domestic, commercial and small industrial consumers.

Hopkison Demand Rate or Two part Tariff

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

In two-part tariff ,the total charge to be made from the consumer is split into two components i.e. fixed charges and running charges. The fixed charges depend upon the maximum demand of the consumer while the running charges depend upon the number of units consumed by the consumer. Thus ,the consumer is charged at a certain amount per kW of maximum demand plus a certain amount per kWh of energy consumed i.e.

In this tariff charge made on maximum demand recovers the fixed charges such as interest and depreciation on the capital cost of building and equipment, taxes and insurance charges and operating cost which is independent of energy supplied by it and varies with the variation of maximum demand. Charge made on total energy consumption recovers the operating cost which varies with variation in energy supplied.


  • It is easily understood by the consumers.
  • It recovers the fixed charges which depend upon the maximum demand of the consumer but are independent of the units consumed.


  • The consumer has to pay the fixed charges irrespective of the fact whether he has consumed or not consumed the electrical energy.
  • There is always error in assessing the maximum demand of the consumer.

Power factor tariff

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

Power factor plays an important role in an a.c system. A low power factor increases the rating of station equipment and line losses. Therefore, a consumer having low power factor must be penalized.

There are various type of power factor tariff:

  • kVA maximum demand tariff : This is the modified form of two-part tariff. In this type of tariff, the fixed charges are made on the basis of maximum demand in kVA and not in kW. KVA is inversely proportional  to power factor ,therefore a consumer having low power factor has to contribute more towards the fixed charges. This type of tariff encourages the consumers to operate their appliances and machinery at improved power factor.
  • Sliding scale tariff: This type of tariff is also known as average power factor tariff. 0.8 is taken as the references average power factor .If the power factor of the consumer falls below this factor, suitable additional charges are made and if the power factor is above this reference a discount is allowed to the consumer.
  • kW and kVAR tariff: In this type of tariff both active power (kW) and reactive power (kVAR) supplied are charged separately. A consumer having low power factor will draw more reactive power and has to pay more charges.
  • Three-part tariff: when the total charge to be made from the consumer is split into three parts i.e. fixed charge, semi-fixed charge and running charge it is known as three-part tariff i.e. on adding fixed charge or consumer’s charge it becomes two-part tariff.


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 kW of energy consumed


  • This type of tariff is generally applied to big consumers.

Maximum demand tariff

Maximum demand tariff is similar to the two-part tariff, the only the difference is that the maximum demand is actually measured by installing maximum demand meter in the consumer premises. This type of tariff removes the drawbacks of two part tariff.


This type of tariff is mostly applied to big consumers and yet not suitable for a small consumers such as for residential consumer as a separate maximum demand meter is required to install in consumer’s side.


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