Home / Electrical Power / Types of Tariff in Electricity | Electricity Tariff: Definition, Examples, Characteristics

Types of Tariff in Electricity | Electricity Tariff: Definition, Examples, Characteristics

The electrical energy that is produced in a power station is delivered to a large number of consumers. The consumers can be convinced to use electrical energy if it is sold at a reasonable price. Here comes the idea of tariffs.

Definition: A tariff is the schedule of rates structured by the supplier for supplying electrical energy to various types of consumers. The rate at which electric energy is supplied to a consumer is known as a tariff.

The following elements are engaged into account to determine the tariff:

  • Types of load (domestic, commercial, industrial)
  • Maximum demand
  • Time at which load is required
  • The power factor of the load
  • Amount of energy used

The way in which consumers pay for electrical energy changes according to their demands. Industrial consumers consume more energy for the relatively longer period than domestic consumers.

Tariffs should be framed in such a way so that it covers the cost of production, cost of supply, and yet yields some reasonable profit.

The price of energy supplied by a generating station depends on the established capacity of the plant and kWh generated. Maximum demand increases the installed capacity of the generating station.

The instant at which maximum demand occurs is too important in plant economics. If the maximum demand of the consumer and the maximum demand on the system take place simultaneously, additional plant capacity is needed.

However, if the maximum demand of the consumer occurs during off-peak hours, then we just need to improve the load factor and no extra plant capacity is needed. Thus, the overall cost per kWh generated is reduced.

Power factor is likewise an important factor from the point of view of plant economics.

 At a low-power-factor, the load current is very high. Therefore, the current to be supplied from the generating station is also large. This high current is also responsible for large I2R losses in the system and larger voltage drops. Therefore, the regulation becomes poor; in order to supply the consumer’s voltage within permissible limits, power factor correction equipment is to be set up. Therefore, the cost of generation increases.

The cost of electrical energy is reduced by using a large amount of energy for a longer period.

Table 1: Consumers and Their Tariffs

Consumers Examples Supply Given Demand Factor Tariff
Domestic Residential load, light, fan, television, radio, electric irons, domestic pumps, coolers, air conditioners 1ϕ: supply up to a load of 5 kW

3ϕ: supply for loads exceeding 5 kW

Small consumers (high unity), big consumers (0.5) 1. Simple

2. Flat rate

3. Block rate

Commercial Shops, business houses, hotels, cinemas, clubs, etc. 1ϕ: supply up to a load of 5 kW

3ϕ: supply for loads exceeding 5 kW

Fairly high 1. Simple

2. Flat rate

3. Block rate

Agricultural Tube wells 3ϕ: power up to 20 kW Unity Flat rate
Bulk Railways, educational institutes, the military establishment, hospitals 3ϕ: power at 415 V or 11 kV depending on their requirement, the load exceeding 10 kW Flat rate
Industrial (small) Atta chakkis, small workshop, sawmill, etc. 3ϕ: power supply at 415 V, load not exceeding 20 kW Usually high (0.8) Block tariff
Industrial (medium) 3ϕ: power supply at 415 V, the load exceeding 20 kW but not exceeding 100 kW Two-part tariff
Industrial (large) Power supplied at 11 kV or 33 kV, the load exceeding 100 kW 0.5 KVA maximum demand factor tariff

Objectives of an Electricity Tariff

  1. Recovery of cost of producing electrical energy at the power station.
  2. Recovery of cost on the capital investment in transmission and distribution systems.
  3. Recovery of cost of operation and maintenance of the supply of electrical energy. For example, metering equipment, billing, etc.
  4. A suitable profit on the capital investment.

Electricity Tariff Characteristics

  1. Proper return. The tariff should be structured in such a way that it guarantees 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 the reasonable profit.
  2. Fairness. The tariff must be fair so that each and every consumer is satisfied with the cost of electrical energy. Thus, a consumer who consumes more electrical energy should be charged at a lower rate than a consumer who consumes little energy. It is because increased energy consumption spreads the fixed charge over a greater number of units. Hence reducing the overall production cost of electrical energy.
  3. Simplicity. The tariff should be simple and consumer-friendly so that an ordinary consumer can easily understand.
  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 a monopoly.
  5. Attractive. The tariff should be attractive so that it can attract a large number of consumers to use electricity.

Types of Tariff in Electricity

1 Flat-Demand Tariff

This is one of the primitive forms of tariffs used for charging the consumer for consuming electrical energy. In this case, the total demand and the energy consumption are fixed. If x is the number of loads connected in kW and a is the rate per lamp or per kW of connected load, then

Energy Charges=Rs. ax

2 Simple Tariff

If there is a fixed rate available for per unit of energy consumed, then it is called a simple tariff or uniform rate tariff.

The rate can be delivered as

\[\text{Cost/kWh=Rs}\text{.}\frac{\text{Annual}\,\text{fixed}\,\text{cost+Annual}\,\text{operating}\,\text{cost}}{\text{Total number of units supplied to the consumer per annum}}\]


  • We cannot differentiate various types of consumers (domestic, industrial, bulk) having different load factor, diversity, and power factor.
  • The cost per kWh delivered is higher.
  • It does not encourage the use of electricity.

3 Flat-Rate Tariff

When different types of consumers are charged at different per-unit rates, it is called a flat-rate tariff. In this type of tariff, the consumers are grouped into various categories, and each type of consumers is charged at a different rate. For instance, the flat rate per kWh for lighting load may be 60 paisa, whereas it may slightly less (say 55 paisa) for power load.


  • More fair to different types of consumers.
  • Quite simple in calculations.


  • It varies with the consumption of electrical energy, and separate meters are required for lighting load, power load, etc. This makes the application of such tariff costly and complex.
  • A particular category of consumers is charged at the same rate irrespective of the magnitude of energy consumed. However, big consumers should be charged at a relatively lower rate, as in this case the fixed charges per unit are reduced.

4 Step-Rate Tariff

A step-rate tariff is a group of flat-rate tariffs of decreasing unit charges for a higher range of consumption. For example,

  • Rs. 4.0/unit if the consumption does not exceed 50 kWh.
  • Rs. 3.5/unit if the consumption exceeds 50 kW but does not exceed 200 kW.
  • Rs. 3.0/unit if the consumption exceeds 200 kW.


  • However, by increasing the energy consumption, the cost is reduced. Thus, there is a tendency with the consumer, just approaching the limit of the step, to anyhow cross the step and enter the next one in order to reduce the total energy cost.

This drawback is removed in block-rate tariff explained below.

5 Block-Rate Tariff

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

For example, the first 40 units may be charged at 70 paisa/unit, next 35 units at 55 paisa/unit, and remaining additional units at 30 paisa/unit.

This is used for the majority of residential and small commercial consumers.


  • Consumers get an incentive to consume more electrical energy.
  • This increases the load factor of the system and hence the cost of generation is reduced.


  • Its principal defect is that it cannot measure the consumer’s demand.

6 Two-Part Tariff

When the rate of electrical energy is charged on the basis of maximum demand of the consumers and the units consumed, then it is called two-part tariff or Hopkinson demand tariff (Table 1).

In this case, the total cost that is to be charged by the consumer is split into two components:

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

∴ Total charges = Rs. (b × kW + c × kWh)

Where b is the charge per kW of maximum demand and c is the charge per kWh of energy consumed.

  • Applicable to industrial consumers who have appreciable maximum demand.


  • Easily understood by the consumers.
  • It recovers the fixed charges that 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 whether he or she has consumed or not consumed the electric energy.
  • There is always error in determining the maximum demand of the consumer.

7 Maximum-Demand Tariff

It is quite similar to two-part tariff; the only difference is that the maximum demand is actually measured by installing maximum demand meter in the premises of the consumer.


  • This eliminates the disadvantage of the two-part tariff, where maximum demand is determined merely on the basis of the chargeable value.

This tariff is mostly applied to big consumers.

8 Three-Part Tariff

In three-part tariff, the total charge to be made from the consumer is split into three parts, that is,

  • Fixed charges
  • Semi-fixed charges
  • Running charges

                                            ∴Total charges=Rs. (a+b×kW+c×kWh)

Where a is the 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 is the charge per kW of maximum demand and c is the charge per kWh of energy consumed.

The principal objection of this tariff is that the charges are split into three compartments. Generally applied to big consumers.

9 Power Factor Tariff

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

A low-power-factor increases the rating of the station equipment and line losses. Therefore, a consumer having low-power-factor must be penalized.

The following are the important types of power factor tariff.

9.1 kVA Maximum-Demand Tariff

It is a modified form of the two-part tariff. The fixed charges are formulated on the basis of maximum demand in kVA, and not in kW. As kVA is inversely proportional to the power factor, a consumer having a low-power-factor has to contribute more toward the fixed charges.


  • It encourages the consumers to operate the appliances and machinery at improved power factor.

9.2 Sliding Scale Tariff

This is known as average power factor tariff. In this case, an average power factor (say 0.8 lagging) is taken as the reference. If the power factor of the consumer falls below this factor, suitable additional charges are made. On the other hand, if the power factor is above the reference, a discount is allowed to the consumers.

9.3 kW and kvar Tariff

In this type, both active power (kW) and reactive power (kvar) supplied are charged separately. A consumer having low-power-factor will draw more reactive power and hence shall have to pay more charges.

Electricity Tariff Example 1

The maximum demand of a consumer is 15 A at 230 V and his/her total energy consumption is 9000 kWh. If the energy is charged at the rate of Rs. 5 per unit for 600 h use of the maximum demand per annum plus Rs. 2 per unit for additional units, calculate (1) annual bill and (2) equivalent flat rate.


Assume the load factor and power factor to be unity.

$\begin{align}  & MaximumDemand=\frac{230\times 15\times 1}{1000}=3.45kW \\ & \text{1}\text{. }Units\text{ }consumed\text{ }in\text{ }600\text{ }h=3.45\times 600=2070kWh \\ & charges\text{ }for\text{ }2070\text{ }kWh=Rs.5\times 2070=Rs.10,350 \\ & Remaining\text{ }Units=9000-2070=6930kWh \\ & ch\arg es\text{ }for\text{ }6930\text{ }kWh=Rs.2\times 6930=Rs.13,860 \\ & Total\text{ }Annual\text{ }Bill=Rs.\left( 13,860+10,350 \right)=Rs.24,210 \\ & \text{2}\text{. }Equivalent\text{ }Flat\text{ }Rate=Rs.{}^{24,210}/{}_{9000}=Rs.2.69 \\\end{align}$

Electricity Tariff Example 2

A consumer has a maximum demand of 150 kW at 50% load factor. If the tariff is Rs. 800 per kW of maximum demand plus Rs. 2 per kWh, find the overall cost per kWh.


$\begin{align}  & Units\text{ }Cosumed/Year=MD\times LF\times Hours\text{ }in\text{ }a\text{ }year \\ & =150\times 0.5\times 8760=657,000\text{ }kWh \\ & Annual\text{ }Charges=Annual\text{ }MD\text{ }Charges+Annual\text{ }Energy\text{ }Charges \\ & =Rs.\left( 150\times 800+2\times 657,000 \right)=1,434,000 \\ & \therefore Overall\text{ }Cost\text{ }/\text{ }kWh=Rs.\frac{1,434,000}{657,000}=Rs.\text{ }2.18 \\\end{align}$

About Ahmed Faizan

Mr. Ahmed Faizan Sheikh, M.Sc. (USA), Research Fellow (USA), a member of IEEE & CIGRE, is a Fulbright Alumnus and earned his Master’s Degree in Electrical and Power Engineering from Kansas State University, USA.

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