Most electric bills are split into two main types of charges: delivery and supply. Delivery charges cover the cost of transporting electricity from the power plant to your home or business, including maintaining the power lines and infrastructure. Supply charges are for the actual electricity you consume, paying for the production of the electricity itself. If you’ve ever ordered food through an app, consider the delivery part of your electric bill as the fees you pay to have your dinner delivered by the app, while the supply portion of your bill is what you pay for the actual meal (the electricity you use).

Additionally, some businesses may see demand charges on their utility bill. Demand charges are based on the highest amount of electricity you use at any single moment, helping to cover the costs of providing enough power capacity for peak usage. In short, delivery charges are like paying for the delivery service, supply charges are like paying for the groceries you buy, and demand charges are like paying extra if you need a lot all at once.

Figure 1: Differences Between Delivery Charges, Demand Charges, and Supply Charges

Understanding Delivery Charges

Delivery or transmission rates are fixed rates set by your local utility company. These rates cover the transportation of the electricity from its source to your home or business. They also include the costs for storing extra electricity, producing more electricity, and keeping the equipment like power lines and transformers in good working order.

Summary of Delivery Charges:

• What They Are: These charges are for getting the electricity from the power plant to your home or business.
• How They Are Calculated: Typically a mix of fixed fees and variable charges based on the amount of electricity delivered, measured in kWh.
• Purpose: To cover the costs of maintaining and operating the infrastructure that transports electricity, such as power lines, poles, transformers, and substations.
• Example: This charge includes costs for maintaining the local network and ensuring electricity is reliably delivered to your location.

Let’s breakdown three types of delivery charges you may come across: Customer Charge, Distribution Charge, and Energy Efficiency Charge.

Customer Charge

The customer charge on your utility bill is a generally fixed fee you pay every month just for being connected to the utility service. It’s a flat rate that you pay regardless of how much electricity or gas you use, ensuring that the utility company can maintain basic services and support for all its customers. Think of it as a membership fee, where the charge helps the utility recover the fixed costs of serving a customer, including meter reading, billing and administration costs.

Distribution Charge

This may also be listed on your bill as ‘Distribution Energy Charge’, ‘Energy Charge’, ‘Energy Cost’, or ‘Delivered Energy Cost’. Your distribution energy charge is the cost of delivering electricity from the local power grid to your home or business. Think of it like the cost of delivering a package directly to your door. This charge covers the maintenance and operation of the local network of wires, poles, transformers, and other equipment needed to distribute electricity to your location. Unlike the fixed customer charge, the distribution charge is based on the actual amount of electricity you use ($/kWh), so it will vary from month to month depending on your consumption. The more electricity you use, the higher this charge will be.

Energy Efficiency and Renewable Energy Charges

Sometimes you may see a “renewable energy” charge on your bill. This does not necessarily mean you’re using renewable energy. Renewable energy charges on your electric bill help to pay for large-scale renewable energy generation. Utilities may put a small charge on your bill to cover the high investment of building renewable energy farms. Similarly, a utility may include an “energy efficiency” charge to help fund state and utility energy efficiency measures.

Understanding Supply Charges

The supply portion of your electric bill covers the electricity you use (measured in kWh) and the rate you pay for that electricity. Supply charges are the costs for the actual electricity used in your home or business. These rates may change throughout the year, so don’t fret if they do! The costs of producing actual electricity are directly correlated to electricity pricing. If you’re procuring natural gas from your utility, and the price of natural gas goes up, so does your utility bill!

Many U.S. states have “energy choice” or “energy deregulation” programs in place. This allows you to compare energy rates from different providers, you don’t have to get your electric supply from your local utility. Similar to shopping for a phone plan, energy choice allows you to find lower energy rates and better plans that lead to significant savings.

Summary of Supply Charges:

• What They Are: Charges for the actual electricity you use.
• How They Are Calculated: Based on the total amount of electricity consumed over the billing period, measured in kilowatt-hours (kWh).
• Purpose: Covers the cost of generating the electricity at power plants and providing it for use.
• Example: If you use 500 kWh in a month, you are charged for those 500 kWh based on the rate per kWh set by your utility provider.

Let’s breakdown two types of supply charges you may come across: generation charge and transmission charge.

Generation Charge

This may also be listed on your bill as ‘Consumption Charge’ or ‘Supply Charge’. Simply put, generation charges represent the cost for the production of electricity. You are charged based on how much electricity you use. This fee covers the cost of making the electricity at power plants, including the fuel and equipment needed to produce it. If you purchase electricity from an electric supplier (such as in deregulated areas where you can select your own), your generation charge will depend on the contract between you and your supplier.

Transmission Charge

Simply put, transmission charges cover the cost of transporting electricity from the power plants where it is generated, through the distribution lines of an electric distribution company, to local substations. This is typically based on the amount of electricity you use, measured in kilowatt-hours (kWh). The rate per kWh is set by the utility company.

Understanding Demand Charges

In certain instances, there may also be a section on your utility bill for demand charges. These charges are based on the peak amount of electricity you need at any single point in time. This fee only applies to commercial and industrial entities that pay time-of-use rates or have certain bill sizes. By default, it is based on the highest 15-minute average usage recorded via the utility meter within a billing period. The more electricity you request during peak periods, the higher your demand charge will be. That means even if you don’t use a lot of electricity overall, but have a period of time where you use a lot of power at once (like running multiple large appliances simultaneously), your demand charge will be higher.

Residential customers typically use electricity at predictable times and at consistent rates. This allows utility companies to charge them based solely on the amount of electricity they consume. In contrast, commercial and industrial facilities use significantly more power, and their consumption rates can vary widely throughout the day, month, or year depending on factors like production and weather. Because of these fluctuations, utilities also charge commercial and industrial customers based on their peak demand. This additional charge helps offset the costs related to managing the power grid and maintaining the infrastructure needed to deliver electricity when these customers require large amounts of power simultaneously.

In general, demand charges to any given customer are based on the peak demand of that customer. This helps cover the costs related to providing sufficient power capacity for peak usage periods, including both local distribution and larger transmission infrastructure. “Distribution” demand charges, however, are related to the local distribution network and reflects the peak demand of that distribution system. This helps cover the costs associated with maintaining and upgrading the local distribution infrastructure to handle peak electricity demands. Both are based on your peak electricity usage, with the distribution demand charges also taking into consideration the distribution network’s capacity.

Summary of Demand Charges:

• What They Are: Charges for the highest level of electricity usage at any single point in time during the billing period.
• How They Are Calculated: Based on your peak demand, measured in kilowatts (kW). This is the highest amount of power you use at once.
• Purpose: Help cover the utility’s costs to ensure they can provide enough power to meet your highest usage moments. This includes maintaining and upgrading the infrastructure to handle peak loads.
• Example: If your peak usage during the month is 20 kW (say, when multiple large appliances are running simultaneously), you are charged based on that peak demand.

Breaking Down Your Utility Bill

Let’s focus on four key elements of the Electric Residential Service section of the sample utility bill above: Customer Charge, Distribution Charges, Generation Charges, and Transmission Charges.

Understanding your utility bill can help you manage your energy costs more effectively. Familiarizing yourself with these components not only helps you understand your bill but also empowers you to make informed decisions that can lead to significant cost savings, improved energy management, and enhanced operational efficiency.