Tiered and Seasonal Rates: Why the Last Kilowatt-Hour Costs More

Why this matters

On a flat rate, a third more energy costs a third more. On a tiered rate it can cost nearly half again as much, and the customer reads that gap as proof something is broken. It is the rate structure doing exactly what it was designed to do. The same structure runs the other way when a shop estimates savings: a kilowatt-hour saved at the top of the bill is worth more than the average kilowatt-hour, until the savings push the house back under the tier line, where the rest are worth less. A tech who quotes savings at the average rate, or reads a tier crossing as a fault, will be wrong in a way the next bill makes visible.

The pieces of a tiered rate

Inclining block rate. The energy charge is split into blocks. The first block of kWh in the billing period is charged at one rate, the next block at a higher one, and some tariffs add a third. "Inclining" means each block costs more than the one before. (Declining block rates, where each block is cheaper, exist mostly on commercial and older tariffs.)

Baseline allowance. On many tiered residential plans the first block is not a fixed number of kWh but an allowance per day, multiplied by the days in the billing period. The allowance is meant to cover essential use, and it is often set by climate zone and by whether the house heats with electricity.

Seasonal rates and seasonal allowances. A tariff can change either the rates, the allowance, or both, between a summer and a winter season. Where summer air conditioning drives peak demand, summer tier rates are often higher. Where electric heat is common, the winter allowance may be larger for all-electric homes.

Proration. A billing period that straddles the season change usually has its allowance and rates prorated by days on each side. The bill shows it as two partial lines.

Every one of these is set in the utility's tariff. The tier boundaries, the allowance per day, the ratio between tiers and the season dates differ from one utility to the next, and many utilities use a flat rate instead. Read the rate schedule named on the bill before you apply any of this to a customer's house.

The arithmetic, laid out

Two 30-day billing periods on the same tariff. The values are illustrative: a baseline allowance of 12 kWh a day, and a tier 2 rate of 1.5 times the tier 1 rate. Real ratios vary.

ALLOWANCE 12 kWh/day x 30 days = 360 kWh
RATES     Tier 1 = R1        Tier 2 = 1.5 x R1
-------------------------------------------------
PERIOD A   340 kWh used
  Tier 1   340 kWh x R1          =  340 R1
  Tier 2     0 kWh x 1.5 R1      =    0 R1
  Energy charge                     340 R1
PERIOD B   450 kWh used
  Tier 1   360 kWh x R1          =  360 R1
  Tier 2    90 kWh x 1.5 R1      =  135 R1
  Energy charge                     495 R1
-------------------------------------------------
USE        450 / 340 = 1.32
CHARGE     495 / 340 = 1.46
AVG PER KWH   A 1.00 R1    B 495 / 450 = 1.10 R1
LAST KWH IN B    1.5 R1

Use rose 32 percent. The energy charge rose 46 percent. Nothing about the house changed except how much it used, and the extra 14 points come entirely from 90 kWh crossing into tier 2.

Check it from the increment. Period B used 110 kWh more than A (450 minus 340). The first 20 of those filled tier 1 up to the 360 kWh line, at R1. The remaining 90 went in at 1.5 R1. So the increase is 20 R1 plus 135 R1, which is 155 R1. 340 R1 plus 155 R1 is 495 R1, matching the table. And 155 divided by 340 is 0.46, the same 46 percent.

Three prices for one kWh

A tiered bill carries three different "costs per kWh," and confusing them is the root of most bad advice:

• The tier rate: R1 or 1.5 R1, depending on the block.
• The average rate: the energy charge divided by total kWh. In period B, 1.10 R1. This is what a customer gets by dividing the bill by the usage.
• The marginal rate: what the next kWh, or the last one, costs. In period B, 1.5 R1, because the house is already in tier 2.

The average rate describes the bill. The marginal rate describes a change to the bill. Any time the question is "what would it cost to add this load" or "what would it save to remove it," use the marginal rate, and watch for the tier line.

Worked example: valuing a savings estimate

A shop is estimating what a measure saving 100 kWh a month would be worth to the household in period B.

At the average rate. 100 kWh times 1.10 R1 is 110 R1. This is the number most savings estimates use, and here it is low.

At the marginal rate, naively. 100 kWh times 1.5 R1 is 150 R1. This is what you get if you notice the house is in tier 2 and stop thinking. Here it is high.

At the marginal rate, correctly. Period B used 450 kWh, 90 above the 360 kWh line. Removing 100 kWh takes the first 90 off tier 2 at 1.5 R1, which is 135 R1, and the last 10 off tier 1 at R1, which is 10 R1. Total 145 R1. Check: the new use is 350 kWh, all in tier 1, so the new energy charge is 350 R1, and 495 R1 minus 350 R1 is 145 R1. Both routes agree.

In period A, the same 100 kWh saving is worth 100 R1, because period A never reached tier 2. A measure that saves the same energy every month is worth different amounts in different months, and the months that matter are the ones above the line.

So the same measure in the same month can be quoted at 110, 145 or 150 times R1 depending on which rate the estimator used, and only one of those is what the customer will actually see. The language for presenting it honestly, as a range rather than a promise, belongs to a sibling (see related: Savings Claims Without Overpromising: The Honest Language).

Worked example: the same kWh in two seasons

Seasonal allowances change the answer for identical use. Say a utility gives 16 kWh a day in summer and 12 in winter for the same house, with the same 1.5 ratio between tiers (again illustrative). A 30-day period using 600 kWh:

• Summer allowance: 16 times 30 is 480 kWh in tier 1. Charge: 480 R1 plus 120 kWh times 1.5 R1, which is 180 R1. Total 660 R1.
• Winter allowance: 12 times 30 is 360 kWh in tier 1. Charge: 360 R1 plus 240 kWh times 1.5 R1, which is 360 R1. Total 720 R1.

720 divided by 660 is 1.09. The same 600 kWh costs 9 percent more in the winter period, with no change in the rates themselves, only in where the tier line sits. If the tariff also raises the tier rates in one season, the gap widens or narrows depending on which season carries the higher rates.

This is why a heating-season bill can look "worse" than a cooling-season bill with the same kWh, and why year-over-year comparisons should match season to season.

Where the tier line shows up in the field

A new load that pushes the house over the line. A heat pump replacing a gas furnace, a new EV, a hot tub. The first kWh of new load may be cheap if the house was well under the allowance; the rest lands in tier 2. A first-month bill after the install can look disproportionate even when the load is doing exactly what it should.

A billing period with more days. Under a per-day allowance, extra days add allowance as well as use, which partly offsets the extra kWh. Under a fixed block size per bill, they do not. Know which the tariff uses before comparing periods of different length (see related: How to Compare Two Bills With Different Billing Days).

Electric heat customers on the wrong allowance. Some tariffs give a larger winter allowance only to homes registered as electrically heated. A house that converted from gas to a heat pump may still be on the standard allowance until someone tells the utility. That is a question the customer can ask; do not promise them the answer.

A solar or battery house. Tier boundaries may apply to net or to imported kWh depending on the tariff (see related: Net Metering and Net Billing: What a Solar House Bill Is Saying).

Time-of-use rates. Many utilities are moving customers from tiers to time-of-use pricing, where the rate depends on the hour rather than the cumulative total. Some plans combine both. A house on a time-of-use plan needs a different analysis (see related: Time-of-Use Rates and Equipment Settings).

Where readers go wrong

Reading a tier crossing as a fault. A 46 percent rise in the energy charge on 32 percent more use is the tariff, not the equipment. The useful number is the kWh change per day, weather-adjusted.

Using one rate for every kWh. Dividing the bill by the usage gives an average that understates what an added load costs and misstates what a reduction saves.

Forgetting the tier line when estimating savings. Savings stop being worth the top rate once they pull the house under the boundary. The bigger the measure, the more of its savings fall at the lower rate.

Comparing across seasons. Different allowances and rates make the same kWh cost different amounts. Compare summer with summer.

How to verify you got it right

• You can name the tier boundary for the period, as an allowance per day times days or as a fixed block, from the bill or the tariff.
• Tier 1 kWh plus tier 2 kWh (plus any tier 3) equals total kWh used.
• An increase in charge, rebuilt from the increment block by block, matches the difference between the two bills.
• A savings estimate states which rate it used and handles the tier crossing explicitly.

References

• See related: Anatomy of a Residential Electric Bill, Line by Line
• See related: How to Estimate an Appliance's Operating Cost by Hand
• See related: Savings Claims Without Overpromising: The Honest Language
• See related: Time-of-Use Rates and Equipment Settings
• The utility's filed residential rate schedule, which sets the tier boundaries, baseline allowances, season dates and tier rates for that territory