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What are the potential drawbacks of selecting the wrong tariff?

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Choosing the right tariff for your energy needs can make a big difference in your bills, savings, and environmental impact. But how do you know which tariff is best for you? And what are the risks of picking the wrong one? In this article, we'll explain what tariffs are, how they work, and what factors you should consider before making a decision. We'll also highlight some of the potential drawbacks of selecting the wrong tariff, such as paying more than you need to, wasting energy, or missing out on incentives.

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Dr Nikhil Jayaraj

Managing Director at Regen Power Pty Ltd | Researcher | 2 x 40Under40 Award winner 20 & 24 | CEO Magazine Executive of…
Juan Carlos Doncel Jones

Socio en Conte-Grand, Doncel Jones & Aicega
Mansoor Khan

Chief Operating Officer, ZKB Energy

1 What are tariffs?

A tariff is the price you pay for your electricity or gas supply, based on how much you use and when you use it. Tariffs vary depending on your energy provider, your location, your contract length, and your meter type. Some tariffs are fixed, meaning they have a set rate per unit of energy for a certain period of time. Others are variable, meaning they can change depending on the market conditions, the time of day, or the season. Some tariffs also have discounts, fees, or rewards for certain behaviors, such as paying by direct debit, switching online, or using renewable energy.

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Mansoor Khan

Chief Operating Officer, ZKB Energy
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Considering the importance of energy transition to renewables and decreasing carbon footprint, a better tariff needs to be offered. Considering it may not be possible to have one tariff across the board, at least efforts be made to come up with guidelines and best practices. One example, cost of carbon footprint or carbon reduction can help determine the viability of any tariff. How much importance we give you carbon reduction and how important it is to maintain global average temperature below certain levels.

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Juan Carlos Doncel Jones

Socio en Conte-Grand, Doncel Jones & Aicega
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Es importante diferencia dos conceptos que parecen iguales pero que naturalmente son distintos; y me refiero a "Tarifas" y "Precios". Las Tarifas normalmente están asociadas a la contraprestación que se paga a prestadores de servicios públicos que funcionan en mercados monopólicos y regulados. Precio en cambio, es un concepto asociado a lo que se paga por un bien o servicio que funciona en mercados en competencia. La Tarifa por lo general es fijada unilateralmente por la Administración, y que el prestador presta su conformidad para facturar a sus usuarios. A los fines de la determinación del Precio, la Administración debe evitar que existan posiciones dominantes que distorcionen la competencia

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2 How do tariffs work?

Your energy bill is composed of two main elements: the standing charge and the unit rate. The standing charge is a fixed amount that you pay every day, regardless of how much energy you use. It covers the cost of maintaining the network and providing customer service. The unit rate is the amount that you pay for each unit of energy that you use, measured in kilowatt-hours (kWh). It reflects the cost of generating and supplying the energy to your home. The unit rate can vary depending on the type of tariff you have, the time of day you use the energy, and the source of the energy.

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Juan Carlos Doncel Jones

Socio en Conte-Grand, Doncel Jones & Aicega
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En la República Argentina, las Tarifas son de competencia Local -ya sea Provincial o Municipal- mientras que el Precio de la Energía es de competencia Federal. En las facturas energéticas, se incluyen 3 conceptos: 1) Cargos Fijo -que es lo que usualmente se denomina VAD o Valor Agregado de Distribución- 2) Cargo Variable -que normalmente cubre el costo mayorista de la energía y la tarifa de Transporte- y 3) Impuestos. En la Tarifa entonces, confluyen ambos conceptos.

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3 What factors should you consider?

When selecting the right tariff for your energy needs, you should consider your consumption patterns, budget and preferences, and environmental impact. If you use a lot of energy, you may benefit from a tariff with a low unit rate and high standing charge. On the other hand, if you use less energy, you may prefer a tariff with a low standing charge and higher unit rate. Additionally, if you use most of your energy at certain times of the day, you could save money with a time-of-use tariff that has different rates for peak and off-peak periods. Furthermore, if you want to lock in a fixed price for a long time, you may opt for a fixed tariff with a fixed contract length and unit rate. Alternatively, if you want to take advantage of changing prices and switch frequently, you could choose a variable tariff with no exit fees and variable unit rate. Finally, if you care about the environment, look for a green tariff that sources some or all of its energy from renewable sources such as wind, solar or hydro. Some green tariffs also offer carbon offsetting which means they invest in projects that reduce greenhouse gas emissions elsewhere.

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4 What are the potential drawbacks of selecting the wrong tariff?

Selecting the wrong tariff can have several negative consequences, such as paying more than necessary, wasting energy, and missing out on incentives. For instance, if you choose a fixed tariff that has a high unit rate and a long contract length, but your energy usage decreases or the market prices drop, you could end up with a higher bill than you would have with a variable tariff. Alternatively, if you choose a tariff that has a low standing charge and a high unit rate but don't monitor your energy usage or switch off appliances when not in use, you could consume more energy than needed and pay more for it. Similarly, if you choose a tariff that doesn't offer any discounts, fees, or rewards for certain behaviors, you might miss out on potential savings. Making an informed decision about the right tariff for your energy needs can be difficult but also rewarding and beneficial. By understanding what tariffs are available and taking into account your lifestyle, budget, and values, you can save money and energy while helping the planet.

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F Javier Alcaide Guindo

Consultor Independiente
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?Cada cuanto tiempo conviene revisar que tarifa te interesa tener? En Espa?a, las tarifas reguladas tanto de gas como de electricidad has sido, y todavía son, las más convenientes para los consumidores domésticos y también para las empresas con consumos parecidos a los de las familias, aunque en el caso de las empresas cada vez se va limitando más para ellas la posibilidad de seguir disfrutando de ellas. Solo ha habido una excepción en el caso de la electricidad durante la pandemia en que durante bastantes meses, sin llegar a un a?o de duración, fue más interesante tener la tarifa del mercado libre, en la época en que los precios del mercado eléctrico superaba la mayor parte de las horas el precio de 250 € por MWh (25 cent por kWh)

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Reza Tabrizi

IoT Platform for Critical Infrastructures of Utilities |Universal AMM/MDM, Smart Metering & Beyond |Enabling Technology Partnership |
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A logical tariff-setting process considers the Levelized Cost of Energy (LCOE) as the key metric to reflect the true costs of energy production. Alongside LCOE, factors such as the Weighted Average Cost of Capital (WACC), Capital Expenditures (CAPEX), Operational Expenditures (OPEX), dynamic pricing models, and consumer affordability are all important. If tariff is not defined correctly, a range of challenges can be expected. High energy tariffs can financially strain consumers, particularly those in lower-income groups, and may lead to increased attempts at tampering and fraud. Conversely, excessively low tariffs risk the financial health of utilities, discourage investment in the energy sector, and necessitate government subsidies.

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Denis Fouchier

Chef de bureau Transition écologique et Prospective
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Il arrive que des mauvais tarifs soient appliqués lors d'une facturation d'énergie. Cela génère plusieurs inconvénients : - si l'analyse de la facture n'est pas poussée : il est possible que cela crée un trou financier dans le budget si l'écart est important, ou à l'inverse, une impression de budget disponible pour d'autres projets - une impression de consommation faible, à tort. Plusieurs mois voire années peuvent passer avant de clarifier la situation, pouvant entrainer un co?t faramineux - Une perte de temps phénoménal pour régulariser la situation avec le fournisseur, entrainant des délais administratifs non souhaités et chronophages.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Dr Nikhil Jayaraj

Managing Director at Regen Power Pty Ltd | Researcher | 2 x 40Under40 Award winner 20 & 24 | CEO Magazine Executive of the Year 24' Finalist | AFR Fast 100 2020 | 4 x FT Top 500 High Growth Companies Asia-Pacific 20-23
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A key aspect not covered is the impact of tariff selection on small businesses. For example, a small café selecting a high unit rate tariff may struggle with increased costs during peak business hours, affecting its profitability. Conversely, a tech startup with flexible hours might benefit from an off-peak rate tariff, optimizing energy costs. Also, tariffs not aligned with energy efficiency goals can hinder sustainability initiatives. Selecting a tariff without considering these aspects can lead to missed opportunities for cost savings and sustainability for various business models, emphasizing the need for tailored energy strategies.

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Wendell Jitta

MBA in Sustainable Energy | Plant Optimization
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Environmental sustainability must always be a key factor when developing or selecting tariffs. Tariffs can be used as a driver for renewable energy, encouraging users to "go green" in their energy selection. Feed-in Tariffs (FiTs) are a financial incentive mechanism designed to promote the adoption of renewable energy sources, such as solar, wind, and biomass. In simple terms, when individuals or businesses generate excess electricity from their renewable energy systems (like solar panels), they can sell this surplus power back to the grid. Governments or energy regulators guarantee a fixed, premium rate for the electricity these renewable systems produce, creating a reliable and attractive income stream for the renewable energy producers.

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What are the potential drawbacks of selecting the wrong tariff?

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1 What are tariffs?

2 How do tariffs work?

3 What factors should you consider?

4 What are the potential drawbacks of selecting the wrong tariff?

5 Here’s what else to consider

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