In this article we will discuss about:- 1. Objective of Tariffs 2. Principal Factors Affecting Framing of Tariffs 3. Types 4. Spot Pricing.  

Objective of Tariffs:

Tariff means the schedule of rates or charges. Tariff, in case of electric supply, means the schedule or rates framed for supply of electrical energy to different classes of consumers.

The main objective of the tariff is to distribute equitably the cost of supplying energy among the various classification of use.

Therefore, a tariff must cover the following items:


(i) Recovery of cost of capital investment in generat­ing, transmitting and distributing equipment.

(ii) Recovery of cost of operation, supplies and mainte­nance of equipment.

(iii) Recovery of cost of metering equipment, billing, col­lection costs and miscellaneous services, and

(iv) A satisfactory return on the total capital investment.

Principal Factors Affecting Framing of Tariffs:


The principal factors involved in fixing of a tariff are enu­merated below:

1. Proper return is secured from each consumer. While fix­ing the tariff for different classes of consumers, it has to be taken into account whether the tariff will result in a revenue meeting all the expenditure of the supply au­thority. In addition, the tariff should bring forth suffi­cient money to enable future expansion to meet an an­ticipated load requirement.

2. The consumers are encouraged to make more extended use of electricity.

3. The tariff should be simple and capable of easy expla­nation to the public. A complicated tariff may cause an opposition from the public which is generally distrust­ful of the supply authorities.


4. The consumers are charged according to what the en­ergy costs. The tariff should be such as to satisfy the consumers of all categories. A big consumer should be charged at a lower rate than a small consumer. This is because increased energy consumption spreads the fixed charges over a greater number of units, thus reducing the overall cost of producing electrical energy.

5. The consumers are encouraged to use power during off-peak hours and penalised for high loads demanded at sys­tem peak by making a provision for higher demand charges.

6. The consumers are penalised for poor power factor.

The type of service rendered by the supply authority also determines the tariff that must be charged to a con­sumer. This is explained below by giving some examples. Electric supply to a domestic consumer, having usually light and fan points, makes the life of an ordinary citizen conven­ient and pleasant. But such a class of consumers cannot be charged at higher rates.


This is because in a welfare state like India, the state has the responsibility to provide some basic necessities to its citizens. Similarly, the farmer for supply of electrical energy to agricultural loads cannot be charged at a higher rate because of the national concern for agricul­tural output. However, the consumers using electricity for extra comforts such as for air-conditioning and for commer­cial purposes can be charged at higher rates. 

Types of Tariffs:

Various types of tariffs, which are commonly used, are de­scribed below:

1. Flat Demand Tariff:

This is one of the earliest forms of tariffs used for charging the consumers for electrical energy consumption. In this case, the total demand and the energy consumption were fixed.


In early days, when the use of electricity was mainly restricted to very few applications such as for lamps etc. and the number of hours of use of the lamps were fixed, they were charged on the basis of number of lamps installed or total load connected in kW and fixed number of hours of use in a month or in a quarter of a year or in a year.

Since the total demand and energy consumption were fixed and all the consumers were of alike class, so the rate could be expressed directly as certain amount per lamp or per unit of load in­stalled.

If x is the number of lamps or load connected in kW and a is the rate per lamp or per kW of connected load then:

Energy charges = Rs ax

In this type of tariff the metering equipment, meter reading, billing and accounting costs are eliminated resulting in over­all decrease of total cost. The main disadvantage of this tariff is that it does not differentiate between the consumers who use same appliance or equipment but for different du­ration of time.

It encourages the consumers to keep their appliances connected to the supply mains even when not required. Nowadays the tariff of this type is restricted to use such as in street lighting, signal systems, sign lighting and other loads where the energy consumption in quantity could be readily predicted.

2. Simple Tariff:

This is the simplest type of tariff ac­cording to which the cost of energy is charged on the basis of units consumed.

The rate can be derived as:

Although this method of deriving the rate is simple and also the drawback of encouraging the consumers to keep their appliances connected to the supply mains even when not required is removed as they have to pay for all the en­ergy consumed but suffers from the following drawbacks:

(i) There is no discrimination among the different types of consumers (domestic, industrial, bulk) having different load factor, diversity factor and power factor.

(ii) The cost per kWh delivered is higher.

The simple tariff can be made suitable by having the following modifications:

(i) A discount is allowed to the consumer who con­sumes more electricity than an average consumer.

(ii) Special tariffs are framed for the various types of consumers just as the domestic consumers using electricity for light and fans are charged at higher rates as compared to power consumers. The reason for it is that the load factor of light and fan load is low and the demand is during peak hours of the day.

(iii) The consumers are encouraged to use electricity during off-peak hours by giving a suitable discount. Such a tariff is called the off-peak tariff.

(iv) The consumers are encouraged to use electricity at high load factor and power factor by framing spe­cial types of tariffs such as maximum demand tariff and power factor tariff.

3. Flat Rate Tariff:

This type of tariff differs from the former one in the sense that the different types of consumers are charged at different rates i.e., the flat rate for light and fan loads is slightly higher than that for power load. The rate for each category of consumers is arrived at by taking into accounts its load factor and diversity factor.

The method is usually most popular with the public since it can easily be understood by the consumers and the calcu­lations at the supplier’s end are simple. If the energy con­sumed during the billing period is x units and the flat rate is Rs a per unit then charges are Rs ax.

The disadvantages of this tariff are:

(i) Separate meters are required for different types of supply.

(ii) Difficulty is experienced to derive the load factor and diversity factor for various types of loads to be employed in deciding the tariff.

(iii) The consumer is charged for the total quantity of energy consumed at the same rate irrespective of the magnitude of energy consumed while increased generation or consumption spread the fixed charges over a greater number of units and so the overall cost per unit decreases as the consumption increases.

4. Step Rate Tariff:

The step rate tariff is a group of flat rate tariffs of decreasing unit charges for higher range of consumption, say for example:

Rs 4.0 per unit if the consumption does not exceed 50 kWh

Rs 3.50 per unit if the consumption exceeds 50 kWh but does not exceed 200 kWh

Rs 3.0 per unit if the consumption exceeds 200 kWh.

This type of tariff takes into account the fact of lower generation cost owing to higher energy consumption conse­quent to improvement of load factor and therefore promotes the use of electricity. The drawback of this tariff is however that by increasing the energy consumption so as just to enter the next range from the final stage of previous range, the total energy cost is reduced.

Thus there is 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:

In this type of tariff a given block of energy is charged at higher rate and succeeding blocks of energy are charged at progressively reduced rates, say for example:

The first 25 units may be charged at the rate of Rs 4.0 paise/unit.

The next 40 units may be charged at the rate of Rs 3.50 per unit.

The consumption exceeding 65 units may be charged at the rate of Rs 3.0 per unit.

The advantage of such a tariff is that the consumer gets an incentive for consuming more electrical energy. This increases the load factor of the system and hence the generation cost is reduced. Its main drawback is that it lacks a measure of the consumer’s demand. This tariff is most popular nowadays among domestic, commercial and small industrial consumers.

6. Hopkinson Demand Rate or Two Part Tariff:

The total charge to be made to the consumer is split into two components namely fixed charge and running charge. Since fixed charge is independent of energy consumed and propor­tional to the maximum demand so the fixed charge is made at a certain amount per kW of maximum demand, which can be assessed on the basis of the rateable value of the premises or on the number of rooms excluding bath rooms, attics etc. or on the connected load or on the total combined kW capac­ity of all the consuming devices owned by a particular con­sumer. Running charge is made at a certain amount per kWh for the total energy consumed.

This type of tariff is expressed by the expression:

Total energy charges, e = Rs. a × kW + b kWh where Rs. a is the charge per kW of maximum demand assessed and Rs. b is the charge per kWh of energy consumed.

This tariff is mostly applicable to medium industrial consumers.

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 variation of maximum de­mand. Charge made on total energy consumption recovers the operating cost, which varies with variation in energy supplied.

The drawback of this tariff from the point of view of consumer is that he is to pay his fixed charge irrespective of the consumption. For example, if during any month any in­dustry remains closed, the owner will be required to pay the fixed charges unnecessarily.

7. Maximum Demand Tariff or Wright Demand Rate:

This tariff is similar to that of two part tariff except that in this case maximum demand is actually measured by a maximum demand indicator instead of merely assessing it on the basis of rateable value. In this tariff the drawback of the two part tariff is removed. This tariff is almost applicable to all bulk supplies and large industrial consumers, who have a control over their maximum demand.

Such a tariff induces the consumer to keep his maxi­mum demand at a low value.

8. Power Factor Tariffs:

Since the efficiency of plant and equipment depends upon the power factor, therefore, in order to increase the utility of plant and equipment to the maximum, the plant must be operated at the most economi­cal power factor.

That is why, sometimes consumers are penalised for poor power factor by applying the following types of power factor tariffs:

(a) KVA Maximum Demand Tariff:

It is a modified form of two part tariff. In this case maximum demand is measured in kVA instead of in kW. This type of tariff encourages the consumers to operate their machines and other equipment at improved power factor, because low power factor will cause more demand charges.

(b) kWh and kVARh Tariff:

In this type of tariff kWh and kVARh are measured and charged separately. Since kVARh decreases with the increase in power factor, therefore, the consumer tries to improve the power factor of his installa­tion in order to decrease the charges on account of kVARh recorded.

(c) Sliding Scale or Average Power Factor Tariff:

In this type of tariff, an average power factor, say 0.8 lagging may be taken as reference and a surcharge for each 0.01 by which the average power factor falls below this figure may be made. Similarly a discount may be allowed for each 0.01 by which the average power factor rises above this figure. Such tariffs are rarely used.

9. Three Part Tariff or Doherty Rate:

In this tariff to­tal charge is split into three elements namely fixed charge, semi-fixed charge and variable charge.

Constant or fixed charge recovers the cost on account of expenses in giving a supply (of any sort or of any magni­tude) service connection (incurred once only but charged for either by a capital or an annum sum or charged each billing period), office and service expenses including accounting, metering and establishment charges.

Semi-fixed charges, which are levied on the basis of maximum demand in kW or kVA, recovers the plant initial cost as well as that operating cost which is independent of total energy supplied by it and varies with the variation in maximum demand.

Variable charges, which are levied on the basis of energy consumed, recovers the cost varying with the variation in energy supplied such as on account of fuels etc.

So the general expression for the recovery of the cost split into three sections mentioned above can be written as:

Total charges = Rs a + b kW + c kWh

Where a is a constant charge made each billing period.

b = Unit charge in Rs per kW of metered maximum demand in kW during billing period. In some cases it is also charged in Rs per kVA so that the consumers are penalised for poor power factor.

And c = Unit charge for energy in Rs per kWh of energy consumed.

This type of tariff is usually applicable to bulk supplies.

10. Off-Peak Tariff:

The load on the power station usually has pronounced peak loads in the morning and early evening and a very low load during the night (from 10 PM to 6 AM). During the night, therefore, and other off-peak period which may occur, a large proportion of the generating and distribution equipment will be lying idle. In case the consumers are encouraged to use electricity during off peak hours by giving a special discount, the energy can be supplied without incurring an additional capital cost and should, therefore, prove very profitable.

This type of tariff is very advantageous for certain proc­esses such as water heating by thermal storage, pumping, refrigeration etc.

Spot Pricing of Tariff: 

The major concern of electric utilities all over the world is very large demand during peak load hours and surplus energy during off peak hours. This put the utilities in awkward situation of capacity shortages during peak load hours and large surplus during off peak hours. In spot pricing, the consumer is charged based on the time at which consumption occur.

This is resorted to offset the imbalance caused because of large demand during peak load conditions and off peak conditions. The price is varied for reflecting the utility cost of providing the electrical energy at a given time. The spot pricing encourages the consumer to shift the maximum demand to off peak hours when the supply is abundant and prices are low.

The spot pricing rate can be expressed as:

Instantaneous spot rate = Incremental operating cost + quality of supply component.

The quality of supply component is chosen so that the resultant price reflects the marginal value of unserved energy. Spot pricing rates are economically rational as they embody the principles of marginal cost theory and result in efficient location of resources. Spot pricing is also sometimes termed as ‘load adaptive pricing’, ‘flexible pricing’, ‘homeostatic control pricing’, ‘real time pricing’ or ‘response pricing’. It is also known as ‘Time of Day Tariff’.

Because of recent advancement in microcomputers and telecommunications and a drastic reduction in metering and communication costs, spot pricing has become feasible and many utilities in developed countries have adopted at least partial spot pricing in their industrial and commercial rate structures.