How Utility Rate Complexity Makes Lowering Energy Bills Challenging
By: Dustin Mandre, Senior Manager, Utility Consumption and Rates, Budderfly
As energy costs continue to soar, many businesses are prioritizing energy efficiency as a way to lower costs. The problem is that lowering energy costs is more complex than most people realize. Cutting 10% of your energy usage doesn’t always save 10% off the bill.
Utility bills often appear simple — a single or couple of line items with a cost next to it. But in reality, they’re incredibly complex, layered with decades of logic that rely on a decaying and outdated infrastructure with no easy way out. The bill tries to make it look like it’s a piece of cake, which in turn makes it harder for customers to understand what they’re being charged for, why it's happening, and what they can do about it.
Energy bills are confusing documents that don’t have fixed prices and instead use varying rates that factor in demand levels and time of use. Understanding how these rates vary can make reading your bill less confusing and help businesses better target opportunities for energy use and reduction.
Baseline Utility Charges Don’t Budge
Every commercial utility bill carries fixed charges that remain constant whether you used 100,000 kWh or zero kWh during the billing period. These include the customer charge, the meter or service charge, and sometimes a minimum bill provision. These baseline charges are relatively small, typically between 5 to 10% of a bill, but understanding how they are billed is crucial to understanding how actual consumption is being charged.
For example, utilities can impose demand-based minimums on your bill. If a commercial tariff bills for a minimum of 50 kW of demand, separate from your kWh consumption, you will be billed for 50 kW or more, even if your actual consumption was less than that. If you cut your peak demand from 40 kW to 30 kW, and the savings is $0 — the minimum 50 kW still applies.
Even more confusing is that most bills do not show all charges that are billed. Some charges are mandated to be shown, but others are rolled up into a bundle — sometimes to mask what they are all for, other times to simplify the look of the bill — it varies by utility. By not showing each charge, they add confusion as to how the bill was calculated.
That’s one of the reasons that the bill Budderfly provides our customer shows every line item for full transparency.
Two Different Products on One Invoice
A kilowatt-hour (kWh) measures how much energy you consume over the month. A kilowatt (kW), also known as demand, measures how fast you consume it during your most usage-intensive interval — typically 15 or 30 minutes, depending on the utility. These two things are billed separately, at separate rates. On a commercial utility bill, the demand charges routinely make up an astonishing 30 to 50% of the total bill, and that share keeps growing.
Utilities bill separately for demand, because the biggest obstacle facing the grid isn't simply generating electricity but being able to deliver it all at once when everyone needs it. Peak periods of energy consumption put the grid at risk, and surcharging high demand helps incentivize customers to use less during these times.
As a result of these charges, you can hypothetically lower your total energy consumption by a large amount but not reduce your peak. That means even though you’re using less, your bill barely budges. The ratio between the two has a name: load factor, which is kWh divided by (billed kW × hours in the period). A low load factor means demand is having the biggest influence on your bill. In that scenario, a strategy aimed at simply reducing overall kWh will address only the smaller half of your overall costs.
The most impactful way to lower your bill is to target your peak periods.
Savings Don’t Always Appear on the Bill When You Expect Them To
Even when you do reduce peak demand, it can take time to see savings reflected in your bills. Some utilities bill for “ratcheted demand,” which is a billing mechanism established to bill you on the highest peak established over the prior 11 or 12 months, not your most recent usage peak. So, even if you lower your peak in September, you may keep paying last August's rate until next August.
The savings are real, and still worthwhile. But because they can be off by up to a year on the demand side, be sure to track when you lower your peak, so you’ll remember the cause when your kW cost finally drops the following year.
Not All Kilowatt-hours Cost the Same
Energy consumption patterns vary each season, month, and day. Utilities have methods of billing for all of these.
Under time-of-use pricing, which bills on varying rates depending on the cost at that particular time of day, a kWh of energy used at 4 pm on an August weekday and a kWh used at 2 am in April can differ in cost by a factor of three or more. Season boundaries, on-peak windows, and holiday exclusions vary by utility, and they're written into the tariff because that's where the utility's own costs impact their bottom line the most.
That means if you try to make sense of your bill by averaging all hours involved in time-of-use pricing to create one all-encompassing energy rate, you’ll miss the important granular data that could help you decide which hours to try to reduce consumption during.
A utility customer might reduce their energy consumption and expect the bill to fall. But instead, they see it rise because, for example, a rate increased for one or more charges and outpaced the energy savings.
The good news: lowering energy usage still saves you money compared to doing nothing. The bill would have risen even more without action.
What It Looks Like in Numbers
Suppose a business uses 60,000 kWh in a month and pays about $7,950 total. Dividing the bill by straightforward usage might suggest that electricity costs about 13.3 cents per kWh.
If the business cuts usage 10% — 6,000 fewer kWh — it might expect to save about $795.
But the bill doesn't work that way. Some charges stay flat regardless of usage, and others are based on things besides total consumption, like peak demand during the month.
Cutting 6,000 kWh only reduces the parts of the bill tied directly to energy use. The actual savings would be closer to $425, not $795.
Using less energy during peak periods, both kWh consumption and kW demand, have an impact on your cost. This is why dividing the whole bill by consumption alone doesn’t work. It dilutes the important details that can actually save you money.
How Budderfly Helps Businesses Decode Confusing Utility Charges to Optimize Energy Usage
Utilities don't design rate schedules to make the least expensive path obvious to their customers. Like any business, they structure costs to benefit themselves first.
At Budderfly, our Utility Rate Specialists analyze usage and tariff data daily to find the best outcome for your business. As noted above, in some cases reducing usage has diminishing returns in bill savings, where further reduction stops paying off; the utility still wants you to be more efficient in your energy usage, but is not always willing to reward it on your bill.
Budderfly does the math for you — both the tariff and the equipment. We optimize tariffs, which show usage and equipment, to target for the greatest impact on cost. We repeat the process constantly, because utility rates and billing structures change often, sometimes monthly. Our energy saving technologies, such as batteries, virtual power plant (VPP), and high efficiency HVACs, can utilize demand response to shape energy usage when and where it matters.
Budderfly helps our customers handle these complications — consumption, demand, and the fine print of utility expense—and we provide more data, insight, and transparency with energy bills. That way businesses can focus on what matters most: running the business.
Contact us today to learn more.
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*Figures above are illustrative. Actual costs will vary by tariff, rate class, load factor, and jurisdiction.