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Understanding Your Electricity Bill: Saving Money on Electricity Starts Here

Updated on August 31, 2013

A quick search will reveal that the Internet is saturated with articles about saving money on electricity bills. If you have been reading these articles, you probably have heard about energy star appliances and compact fluorescent light bulbs and not keeping your refrigerator door open longer than necessary and using fans instead of air conditioning and so on. But do you know how much you are actually paying for your electricity? If you don't know the basics about how electricity usage is priced, simply looking at your bill might be confusing and may not be very helpful towards figuring out how much electricity you used and how much money you ended up paying per unit. This article aims to provide you with the necessary background to understand your electricity bill. That way you will be able to make decisions such as whether it makes any sense to keep the refrigerator running over a period of time (such as a long trip or vacation) by comparing the cost of electricity to the cost of the food inside the fridge.


Basic Terminology

Before putting a price tag on electricity, one has to be able to measure it, just like everything else that is bought and sold.

Electricity usage is measured in kilowatt-hours, abbreviated kWh, which is defined as the quantity of electrical energy consumed by a 1000 watt device in one hour, or equivalently, by a 100 watt lamp burning ten hours. Most appliances will include some information about their electricity consumption, either on a label or on an engraving, usually on the back of the appliance. To calculate the energy consumed by an appliance, multiply the wattage of the device with the number of hours it was used and then divide by 1000 (so that the result will be kilowatt-hours, not watt-hours).

For example, a 100-watt lightbulb which was used for a total of 20 hours in a month will have consumed

100 x 20 ÷ 1000 = 2 kilowatt-hours

of electrical energy.

Some appliances will list amperes instead of watts, which may look like "3 amps" on the label. If this is the case, multiplying the voltage with the amperes will yield the wattage of the device. The household electricity is 120 volts in United States, Japan and Taiwan; while it is 230 volts pretty much everywhere else in the world. So, in United States, if an appliance listed as 5 amperes runs for 10 hours, it will have consumed

120 x 5 x 10 ÷ 1000 = 6 kilowatt-hours

of energy.

Some appliances, especially those that perform complicated tasks such as refrigerators, ovens and washing machines may use less energy than the amount indicated on their label; in fact, the indicated wattage is the maximum amount of energy that the appliance may use at any time. Therefore, for such appliances, it is impossible to determine the exact amount of electricity consumption by simply looking at their label. A watt-hour meter may be used to accurately measure electricity usage of any device.

Sample Wattage of Common Appliances

(click column header to sort results)
Medium Size Window AC
Clothes Dryer
Refrigerator (Average)
Dishwasher (with water heating)
Dishwasher (no heating or drying)
Electric Oven, 350°F
CFL Light Bulb (60-watt equivalent)
Desktop Computer & 17" CRT monitor
Laptop Computer
32" LCD Television
Microwave Oven
4-Slot Toaster
Coffee Maker
Sample energy consumption data, taken from the website of Michael Bluejay,


During a weekend trip in United States, the Browns used four 100-watt light bulbs for 8 hours, a 1.25 ampere TV for 4 hours, a 900-watt air conditioner for 6 hours and a 900-watt coffee maker for 1 hour. What is the total amount of electricity (in kWh) used by the Browns during the weekend?


For the light bulbs, a total of

4 x 100 x 8 ÷ 1000 = 3.2 kWh

of electricity was used.

For the TV, since household electricity is 120 volts in U.S.,

1.25 x 120 x 4 ÷ 1000 = .6 kWh

was used.

The air conditioner used a total of

900 x 6 ÷ 1000 = 3.6 kWh

of electricity.

Finally, the coffee maker used

900 x 1 ÷ 1000 = .9 kWh

of electricity.

Adding all up, we find that a total of

3.2 + .6 + 3.6 + .9 = 8.3 kWh

of electricity was used over the weekend.

Cost of Electricity

Now that we have an understanding of how electric usage is measured, we can move on to investigating our electricity bill to figure out how much money we are paying per kilowatt-hour of electricity.

There may be many different types of charges on your bill, which is probably the main reason why it is so complicated to figure out what you are actually paying per unit. Some of these charges are fixed, meaning you will pay the same amount regardless of how much electricity was consumed. These fixed charges are often labeled as "service charge", "standing charge", "customer charge", "basic charge", "cost of service", etc. Other charges are variable, which means it was based on the amount of electricity consumed in that billing period. These charges will list a unit price and the amount of electricity that was used in kilowatt-hours. The charges that are labeled "supply charge", "energy charge", "distribution charge", "transition charge", "transmission charge", "generation charge" are examples of variable charges. The price you are paying per kWh of electricity will be the sum of all the unit prices of these variable charges.

Let's take a look at the following data which was taken from this sample bill:

Delivery Services
Customer Charge
Distribution Charge
.03378 x 955 kWh
Transmission Charge
.00910 x 955 kWh
Transition Charge
.00559 x 955 kWh
Demand Side Management
.00230 x 955 kWh
Total Delivery Services
Supply Services
Energy Charge: Standard Offer
.08300 x 955 kWh
Renewable Energy Charge
.00062 x 955 kWh
Total Supply Services
Breakdown of charges from a sample electricity bill.

Here, the "Customer Charge" is a fixed charge since there is no information about the number of units consumed or cost per unit. All the other charges are variable, because they list the cost per unit depending on the type of charge (in dollars, such as ".03378", which corresponds to a little more than 3 cents) and the usage amount (955 kWh). Adding all the costs per unit, we find that this customer ended up paying 13.4 cents per kWh, excluding the fixed costs, taxes, etc.

Electricity Supply Services
Electricity Supply Charge
512 kWh x 0.07653
Transmission Services Charge
512 kWh x 0.00730
Delivery Services
Customer Charge
30 days x 0.28
Distribution Facilities Charge
512 kWh x 0.02463
State Tax
6.5 %
Alice's Electric Bill for June


Alice's electric bill for the month of June is given in the table to the right. She estimates that for July, her electricity consumption will be up by 200 kWh because of a new appliance that she bought. Assuming there won't be any changes in the price per kWh of electricity, how much will she pay for electricity in July?


According to Alice's estimates, her consumption will be 712 kWh. We will go line by line and calculate her charges for July.

  • Electricity Supply Charge: 712 kWh x 0.07653 = 54.49
  • Transmission Services Charge: 712 kWh x 0.00730 = 5.20
  • Customer Charge: 31 days x 0.28 = 8.68
  • Distribution Facilities Charge: 712 kWh x 0.02463 = 17.54
  • 6.5% State Tax on 85.91: 5.58

Therefore, in July, Alice will pay 91.49 dollars on electricity, which is 23.41 dollars more than what she paid last month.


Tiered Rates

Depending on your company, certain charges that you pay by the kilowatt-hour may be tiered, which means as your usage exceeds certain levels (called tiers), the price you pay per kWh increases. This way, excessive usage is discouraged and therefore electric companies do not have to make costly investments just to be able to meet the demand. If your company uses tiered rates, you will see increasing amounts of price per kWh for the same charge, usually accompanied by explanations like "price for the first 600 kWh", "price for the next 500 kWh", etc.

Number of Tiers
Tier 1
Tier 2
Tier 3
Tier 4
Tier 5
Pacific Gas & Electric
%101-%130 of Tier 1
%131-%200 of Tier 1
%201-%300 of Tier 1
Excess of %300 of Tier 1
Southern California Edison
%101-%130 of Tier 1
%131-%200 of Tier 1
Excess of %200 of Tier 1
Florida Power & Light
Up to 1000 kWh
Excess of 1000 kWh
Georgia Power
Up to 650 kWh
650-1000 kWh
Excess of 1000 kWh
Dominion Resources
Up to 800 kWh
Excess of 800 kWh
DTE Electric
Up to 17 kWh per day
Excess of 17 kWh per day
Public Service Electric & Gas
Up to 600 kWh
Excess of 600 kWh
Energy Charges:
First 462 kWh
462 kWh x 0.13009
463 - 601 kWh
139 kWh x 0.15157
602 - 924 kWh
323 kWh x 0.19704
Over 924 kWh
40 kWh x 0.23645
Bob's electric bill from last month.


Bob's electric bill from last month is given in the table to the right. By switching to cold wash cycles, Bob thinks he can reduce his electricity consumption by 65 kWh. Assuming there won't be any changes in the price per kWh of electricity, how much would Bob save by switching to cold wash cycles?


Adding usage information from all tiers, we find that Bob consumed a total of 462 + 139 + 323 + 40 = 964 kWh of electricity. As his electricity consumption decreases by 65 kWh, he will observe the following charges on his bill:

  • First 462 kWh: 462 kWh x 0.13009 = 60.10
  • 463 - 601 kWh: 139 kWh x 0.15157 = 21.07
  • 602 - 924 kWh: 298 kWh x 0.19704 = 58.72

Adding these charges, we find that Bob will pay 139.89 dollars for electricity this month, which is 14.38 dollars less than what he paid the previous month.

Seasonal Rates

Instead of or in addition to tiered rates, your company may be charging seasonal rates for electricity, which usually means more expensive electricity in the summer. The reason for such a pricing policy is to make up for the heavy strain on the energy grid caused by a lot of air conditioners running at the same time. To determine if your company is charging seasonal rates for electricity, you should compare the price per kWh (of the same tier, if the rates are tiered) of summer months to that of the winter months.

Time-of-use pricing requires a smart meter.
Time-of-use pricing requires a smart meter. | Source

Time-of-Use Pricing

In this pricing model, the price per kWh of electricity depends on the time of the day, early mornings and late nights being the cheapest and afternoons being the most expensive. If your bill contains words such as "peak", "off-peak" or "part peak", you are probably subject to time-of-use pricing. This kind of pricing was made possible by what are commonly known as "smart meters", which records information about what time of the day electricity was used, in addition to how much of it was used. If your dwelling is equipped with a smart meter, the chances are that you are paying for your electricity on a time-of-use basis.

If you find out that you are on a time of use pricing schedule, you should look for ways to shift some of your energy consumption to off-peak hours. Of course, it is impossible to avoid using certain appliances such as air conditioners or electric heaters during peak hours, but some appliances, such as washers and dryers, can be used during off-peak hours without much difference.

Electricity Charges
527 kWh x 0.059
256 kWh x 0.089
315 kWh x 0.107
Carol's electric bill from last month.


Carol's electric bill from last month is given in the table to the right. If she were to shift 100 kWh of her usage from peak to off-peak hours, how much would she save, assuming there won't be any changes in the prices?


With 100 kWh shifted from peak to off-peak hours, Carol's new charges will be as follows:

  • Off-peak: 627 kWh x 0.059 = 36.99
  • Mid-peak: 256 kWh x 0.089 = 22.78
  • Peak: 215 kWh x 0.107 = 23.00

Adding these charges, we find that Carol pays 36.99 + 22.78 + 23.00 = 82.77 dollars for electricity, which is 4.80 less than what she paid before.

Demand Charge

To cover the costs arising from the heavy demand on the grid, some companies may charge their customers a "demand charge", which is based on how fast electricity was consumed, rather than how much of it was consumed. Therefore, the demand charge is measured in kilowatts instead of kilowatt-hours. Customers who run a lot of appliances at the same time are subject to higher demand charges compared to the customers who spread out their electricity consumption, even if they end up using the same amount in kWh at the end of the month; because the former puts more strain on the grid compared to the latter. If you are subject to demand charges (which will be indicated on your bill), you should avoid running a lot of appliances at the same time.


Although most of the common practices in electricity pricing have been discussed in this article, your company's policies may be different. The only way of knowing what you are being charged is examining your bill. Try to understand everything on your bill and if you can't, don't hesitate to ask your company to explain. That way, saving money on electricity will be as easy as running an appliance a few hours later instead of now or running them one after another instead of at the same time.


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  • Altay Gursel profile image

    Altay Gursel 17 months ago from Moscow, Russia

    Ozgur very informative article, thank you for sharing with us.

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