How Your Utility Bill is Charged and What to Watch Out For

Everyone knows that if your company or non-profit organization owns an office building, you will pay a monthly or quarterly utility bill. But, what exactly are you paying for in that bill, and how does your provider come up with that monthly sum?  Your charges can be heavily impacted by the nature of your electrical usage. Read on as we break down the components of your electrical bill.

Electrical Bill Components

Most electrical bills are composed of 5 primary components: 

  1. Customer Charge (fixed each month) 
  2. Demand Charges (kW)
  3. Energy Charges (kWh)
  4. Fuel Adjustment Charges
  5. Environmental, Regulatory, etc. Surcharges 
  6. Sales Taxes (if applicable)

Let’s jump into the customer charge first.

1. Customer Charge 

The customer charge is fixed each month on your utility bill and will be determined by your provider at the start of your contract. 

2. Demand Charges (kW)

Demand charges are fees applied to the electric bills of commercial and industrial customers based upon the highest amount of power drawn during any interval of the billing phase. Most utilities monitor demand, otherwise known as your power load, every second and then calculate an average kW load over 15 minutes. This operates much like a car’s computer calculating average speed.

The highest peak load for any 15-minute interval is recorded each month as well. This will likely be shown on your bill as the demand charge. If you own an office building, it’s important that you understand these charges otherwise your utility bill can increase quickly. However, power factor and ratchets can influence the amount billed, so we will talk about those impacts next.

The Impact of Power Factor

Power Factor is an expression of power quality and can range from 0 to 100%, and is usually measured by your utility.  Power Factor is the ratio of kW divided by kVA (kiloVolts*Amps). Power Factor is influenced by inductive loads such as motors as well as other processes like welding.  Because large motors are popular in many buildings, it is worth looking to see if you have a PF penalty on your utility bill. 

What is a Ratchet Clause?

A ratchet clause is definitely a pricing strategy to look out for. If you aren’t familiar with a ratchet clause, it is when a utility requires that the demand charge for a month with a low demand may be increased to be more consistent with a month that set a higher demand charge. Basically, a ratchet clause (or similar pricing strategy) can motivate clients to use power in a more consistent pattern throughout the year, which makes it easier for the utility provider to forecast and deliver energy based on more level loads.  If you notice that your billed demand doesn’t change from month to month, it is highly likely that you are ratcheted. 

Here is how ratcheted demand charges are calculated based on an example from Profitable Green Solutions. Your provider will notice when you set a new high peak demand.  If the ratchet is 80%, then going forward for the next 11 months, the utility sets a minimum billed demand for around 80% of the maximum recorded peak kW.  With that being said, even if you use a smaller amount of power during a succeeding month, you will be billed 80% of your previous peak.  Note that ratchets typically vary from 50% to 100%, so it is good to know the ratchet level.

3. Energy Charges (kWh) 

kWh charges represent the amount of energy you consume over a month’s period. An analogy to best understand this type of charge is to compare it to filling up a swimming pool. If you were filling up a swimming pool, the volume of water would be similar to the kWh charge, while the flow rate out of your hose would be analogous to kW charges.

4. Fuel Adjustment Charges 

Another part of an electricity bill or utility bill is the Fuel Adjustment Charges. These charges are periodic adjustments to account for the price variance of commodity fuels that are used to create electricity.  For example, if the price of natural gas increases, then the utility provider will pass those variable costs on to consumers.  Because most utility providers are highly regulated, fuel adjustment charges are easier to implement than adjusting the rate structure or tariff structure.

5. Environmental, Regulatory and Other Miscellaneous Surcharges

Many people don’t realize that these surcharges can add 10% to your electric and utility bill.  Unfortunately, there is not much you can do about these miscellaneous surcharges, but when calculating savings, be sure to count these charges as well as the charges from sales taxes. Sales tax charges, if applicable, range roughly from 5 to 9 percent.

For More Information 

For more helpful information related to your utility bill and demand charges, check out some of these blog posts.

If you are interested in lowering the sum of your utility bill, contact us for a free energy audit!

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