Electric utility costs can represent a significant portion of annual operational expenditures for businesses. While there are many ways to reduce how much your company spends on electricity (like solar!), the first step to reducing your electricity bills is to understand what’s on them: what are the components of your electricity bill, how do they impact the price you pay for electricity, and what can you do to reduce those costs?
- Electricity bills generally have both fixed and variable charges.
- It’s important to understand the different components of your rate, as well as how your utility rate charges you for the electricity you use.
- The best ways to lower your company’s electricity bill are to reduce how much electricity you consume and to install solar.
- Start saving money by investing in solar for your business with EnergySage.
Types of charges on your business’s electricity bill
Electricity bills consist of two main components: fixed charges and variable charges.
Fixed charges are often in the form of a customer or interconnection charge. These charges are either a flat monthly fee (i.e., $50 per month) or are expressed as a cost per day (i.e., $6 per day, multiplied by the number of days in the billing period).
Variable charges, on the other hand, are based on how much electricity you use. Often referred to in the industry as volumetric charges, variable charges change month to month based on the volume of electricity you use, when during the day or week you use it, and how much of it you use at one time.
Types of variable charges on electricity bills
There are a few different types of variable charges: supply charges, transmission and distribution charges and demand charges. Supply and transmission and distribution charges are billed on a per-kilowatt-hour (kWh) basis (i.e., how much electricity you use over the course of a month), while demand charges are billed on a per-kilowatt (kW) basis (i.e., what’s the most amount of electricity you pull from the grid at any given time).
Supply charges represent the actual electricity that you’re purchasing: the electrons that are produced by power plants flow through transmission lines, reach your business, and power your processes. The price you pay for the supply of electricity at your business depends on a few key factors, but the most important thing that influences the cost of supply is the type of power plants that provide your power, and the cost of the fuels that power them. For instance, if electricity is primarily produced by natural gas power plants in your region (as it is where EnergySage is headquartered in the Northeast), then the cost of natural gas is the most important factor that determines the cost of electricity supply on your bill: when the cost of natural gas increases–like it does in the winter in New England–so too will your supply charge increase.
Transmission and distribution charges
While the supply charge covers the actual electrons that power your business, transmission and distribution (T&D) charges pay for the infrastructure that gets those electrons from power plants to your business: the poles and wires, step down stations, and substations that together comprise our transmission and distribution grid. This charge includes both building new transmission–such as to enable the interconnection of more renewable energy–as well as the maintenance and upkeep of the existing grid (turns out wood distribution poles are susceptible to woodpeckers!). Note: T&D charges aren’t separated from supply charges everywhere, but are in most major markets.
Increasingly, many utilities are charging not just for the volume of electricity that businesses use over the course of a month, but also for the most amount of electricity you pull from the grid at any given time over the course of the billing period. Because this is more of a snapshot in time of your energy usage, demand charges are expressed as the amount of power your facility needs (i.e., kW). Demand and overall energy consumption are both important pieces of the puzzle that utilities need to consider when designing and operating the grid, which is why utilities want the insight into both your monthly usage and peak power requirements.
What about non-profits?
In most cases, utilities set rate structures based on how a facility consumes electricity, and not based on its taxable status or exemptions. As a result, whether you work at a for-profit or non-profit entity, the same type of electricity rate will apply to your organization, meaning the information in this article applies to both for-profit businesses and non-profit organizations.
Additional charges to be aware of
There’s likely also a portion of your electricity bills called non-bypassable-charges, or NBCs. These are usually a public benefit charge and are typically also variable charges (i.e., $/kWh). Crucially, they’re called non-bypassable because you can’t avoid them with solar. In other words, it means that every kWh you put onto the grid with solar will be worth slightly less than every kWh you take off the grid. Generally, NBCs amount to no more than two or three cents per kWh.
In many cases, you’ll likely also have local sales tax on your bill – don’t forget this when thinking through the different aspects of your bill!
Types of rates to be aware of
There are generally four different types of rate structures that your business might be on: flat, tiered, time varying (TOU) or demand.
- Flat rate: If your business is on a flat rate, that means you’ll pay a consistent rate for electricity regardless of when you use it or how much of it you use.
- Tiered: On a tiered rate, you’ll pay a different rate based on how much electricity you use. Rates change at different tiers–i.e., one rate up to 1,000 kWh per month, and another after that.
- Time varying: With time varying rates, the price you pay for electricity varies based on the time of day, week, or season when you’re using it.
- Demand: These rates incorporate not just a per-kWh rate but also a per-kW demand charge.
How to lower your company’s electricity bill
Once you know what’s on your business’s electricity bill, there are four main ways to reduce your monthly electricity spending:
- Shift when you use electricity: if your company is on a time-varying rate structure like a TOU rate, then the timing of when you use electricity matters. If you can shift your usage from high-priced periods to lower-priced periods of the day, then you can reduce your overall electricity spending significantly.
- Use less electricity overall: since both the supply charge and the transmission and distribution charge are volumetric–based on the total number of kWh you use per month–the less electricity you use per month, the lower your electricity bill will be. Easy!
- Install solar to reduce what you use from the grid: once you’ve taken every step you can to manage how much electricity your business uses, the next step is to pay less for the electricity you use, and there’s no better way to do that than to go solar. The cost of every unit of electricity produced by solar panels on your property will be significantly less than the cost of purchasing electricity from the grid.
- Install storage to help with demand charges or TOU rates: if your company is on a demand charge or TOU rate, installing storage can help you avoid the largest charges on your electricity bill by reducing your peak pull from the grid and shifting your usage to lower price periods or storing solar to use during high priced times of the day.
Reduce your electricity spending by going solar with EnergySage
Investing in solar is an ideal way for your business to reduce your electricity bills. When you register for a free account on EnergySage, we’ll work with you to understand your business’s energy needs and spending, send you a free solar feasibility study, and work with our network of high quality solar installers to gather competing, custom quotes for your company.