How it works
A consumer's bill usually has several parts. In symbols, Bill = e × E + d × D_max + F + T. Here e is the energy charge in $/MWh and E the energy used in the billing period in MWh. d is the demand charge per kW or kVA per month, and D_max the highest demand recorded in the period, typically the peak 15- or 30-minute average. F is the fixed charge and T the taxes and duties. Large consumers may also face power factor penalties, time-of-day rates, and rates that vary with supply voltage.
For a regulated utility, the regulator approves the tariff from the utility's cost of supply plus an allowed return. That revenue is then split across consumer categories, and some categories pay more than their cost so others can pay less. When renewable supply replaces grid power, the energy charge and the taxes on it are usually saved. The demand and fixed charges for keeping the connection mostly remain. The fair comparison is therefore between the landed cost of the new supply and the avoidable part of the tariff.
Why it matters
The tariff is the benchmark for any procurement decision. A buyer saves only the parts the new supply displaces, so dividing the whole bill by energy used overstates the saving. For a developer selling to industrial customers, the tariff sets the ceiling on what they will pay. Tariff orders are usually revised every year. Each revision can strengthen or weaken the case for on-site solar, storage or open access.
A worked example
A factory uses 2,000 MWh in a month, with a peak demand of 5,000 kW. Energy costs 2,000 × $90 = $180,000. Demand costs 5,000 × $12 = $60,000. Tax at 5% on energy is 0.05 × 180,000 = $9,000. With a $2,000 fixed charge, the bill is $251,000, an average of 251,000 ÷ 2,000 = $125.50/MWh. The avoidable part is only 90 × 1.05 = $94.50/MWh. An offer landing at $100/MWh beats the average but costs more than the grid energy it replaces.
Illustrative figures.
Across markets
In India, state regulators set tariffs each year, and industrial and commercial consumers pay above their cost of supply to support farm and household tariffs. That gap is why open access appeals to them, and why the cross-subsidy surcharge exists. In the US, state commissions set utility rates, and in competitive retail states the energy part comes from a retail supplier. In most of Europe, energy is bought from competing suppliers while network charges and levies stay regulated.