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December 15, 2021

How You Are Billed for Electricity

A guide on different electricity plans and how solar can help save money
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Blog - How You Are Billed for Electricity

Over the last few decades, technology has advanced significantly and with these advancements more devices are added to your home requiring you to use more electricity. Electric utilities or service providers provide your home or business with electricity through the grid and typically offer many different ‘rate plans’. Rate plans determine how and when you are charged for the electricity you consume. You can view the specifics of your rate plan on your utility bill, and sometimes the utility may give you the option of choosing the rate plan that you want.

Choosing a rate plan can be a hard and confusing decision for many, but there are a few factors to consider when selecting your plan. Understanding the types of electricity plans and your electricity usage patterns will help you understand your electricity bill and how you can save money. Adopting solar can help reduce your electricity bill and even eliminate it entirely. We’re here to explain the most common rate plans and how installing solar can reduce your bills.

Flat rate/fixed rate

The flat rate plan is the most simplistic but is not offered as frequently as other plans. This plan typically includes a flat base fee, then a fee for each kilowatt-hour (kWh) of energy consumed during each billing period. Billing periods are typically 6-12 months. This agreement is straightforward and the rate per kWh charged by the utilities tends to increase over time. For example, in the U.S. the price of Residential Electricity has increased by 30% over the last 10 years. Each kWh of energy that solar produces offsets the $/kWh that the utility charges.

Tiered Rates

Figure 1 Tiered rates example (Photo source: PG&E)

Tiered rates plans are a structure in which the more electricity you use, the higher your rates get. In each tier, you are allowed a certain amount of power in kilowatt hours (kWh). Once you exceed the amount in the tier, you will move into the next highest tier and so forth. Solar can offset the high $/kWh costs and potentially keep you in a lower cost tier by producing your own energy allowing you to pull less energy from the grid.  

Time-of-use rates

Figure 2 Time-of-use rates example (Photo source: Aurora Solar)

Time of use plans are based on how much energy you use and when you use it. Most plans have selected hours that have higher ‘peak’ rates for specific hours in a day. For example, PG&E, located in California, has peak rates set from 3-8pm on weekdays (see Figure 2). Sometimes these peak periods coincide directly with solar energy production, in which case solar is generating you even more savings during these times. In other instances, technologies that shift energy load – such as batteries – can help capture additional savings during this period.

Demand charges

Figure 3 Demand charge example (Photo source: Cosmic Solar)

Demand charges add complexity to electricity plans. To put it simply, you are paying for the cost it takes for the utility company to maintain and supply your building with electricity in addition to your typical energy usage costs. To know how demand charges are calculated, you need to know what demand is. In this case, demand is the maximum amount of power you consume in a given period of time, usually measured in 15-minute intervals, within the month. This is also known as peak demand in the industry which is measured in kilowatts (kW) and is shown in Figure 3.

To calculate your demand charge amount, you would multiply your peak demand in kW by your electric demand charge – shown in $/kW. The higher your peak demand consumption in kW, the higher your demand charge. Typically demand charges represent a portion of the utility bill and are often combined with Time of Use energy rates and they are most commonly used on commercial rate plans.

Solar paired with storage is effective at lowering demand charges by offsetting consumption during the peak hours of the day. For further explanations on demand charges, watch this video from Slipstream and for a deeper dive read this article from Renewable Energy World.

Summary

Now that you know the common types of electricity plans and how solar can help reduce your bill in each scenario, you can take a deeper dive into understanding how to read your electricity bill by checking out this article from AuroraSolar. Solar energy systems have the potential to reduce your electricity bill costs and may even eliminate your bill altogether allowing you to have energy independence. See how much switching to solar can save you by using this calculator from EnergySage.

To learn other reasons why people switch to solar or if solar is right for you, read our next blog. Follow us on social media to be notified when our next blog is live.

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References

https://www.pge.com/en_US/residential/rate-plans/rate-plan-options/tiered-base-plan/tiered-base-plan.page

https://www.aurorasolar.com/blog/how-time-of-use-rates-work/

https://www.cosmicsolar.com/what-are-demand-charges

https://www.youtube.com/watch?v=JqqOM9nzz-A&ab_channel=Slipstream

https://www.renewableenergyworld.com/wind-power/making-sense-of-demand-charges-what-are-they-and-how-do-they-work/#gref

https://www.aurorasolar.com/blog/reading-your-electricity-bill-a-beginners-guide/

https://www.energysage.com/solar/calculator/

To Learn More

About the timeline of solar: https://www1.eere.energy.gov/solar/pdfs/solar_timeline.pdf 

U.S. solar capacity data: https://www.energy.gov/eere/solar/solar-energy-united-states 

Environmental benefits of solar: https://www.seia.org/initiatives/climate-change#:~:text=Through%20Q2%202020%2C%20the%20U.S.,tons%20of%20carbon%20dioxide%20emissions

Global solar capacity data: https://www.nsenergybusiness.com/features/solar-power-countries-installed-capacity/ 

TED-Ed: How do solar panels work? https://ed.ted.com/lessons/how-do-solar-panels-work-richard-komp#watch

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