The effective rate of an electricity plan is the rate you actually pay per kilowatt-hour (kWh) of your energy usage, which can include flat monthly fees, an energy charge per kilowatt-hour, and utility delivery fees, all while accounting for potential discounts. Meanwhile, advertised rates, also referred to as the average rate per kilowatt-hour, can deceptively make your energy rate look lower than it may be in reality.
Knowing your effective rate allows you to effectively compare plans and more accurately estimate your monthly bills.
What Is an Effective Rate?
The effective rate of an electricity plan in Texas is the all-in rate per kilowatt-hour of energy, including various taxes and charges. It depicts a more realistic energy rate, helping you get a sense of what you might actually pay and compare plans more accurately.
Advertised Rate vs. Effective Rate: Understanding the Difference
The advertised rate of an electric plan is an estimated cost of energy per kilowatt-hour for a specific energy consumption threshold, such as 500 kWh, 1,000 kWh or 2,000 kWh. However, because the advertised rate comprises several fee types, including charges per kilowatt-hour and flat monthly fees, it’s only accurate at the precise advertised levels. If your usage strays outside of those levels, the advertised rate no longer applies.
There’s more. The advertised rate doesn’t include federal, state or local taxes. Additionally, advertised rates may include assumed discounts, such as bill credits, times of use, or tiered rates, which can make the average price per kilowatt-hour appear significantly lower than your effective rate may actually be if your usage doesn’t meet the requirements for said discounts.
On the other hand, effective rates include all fees and account for any possible discounts, showing a more realistic price for an electricity plan.
For example, a retail electricity provider (REP) may advertise a rate of 10 cents for 1,000 kWh of usage with an enticing discount, such as a bill credit. If your usage is precisely 1,000 kWh, you may pay that rate. However, if your usage dips below 1,000 kWh, you won’t receive the bill credit, at which point you will pay the full energy charge, which may be around 15 cents per kWh. Add in the TDU delivery fees, and your effective energy rate may be around 20 cents per kWh, which is essentially double the advertised rate.
How Do I Calculate My Effective Rate?
You can calculate your effective rate by dividing the final bill amount on your electric bill by the total number of kilowatt-hours consumed. Let’s take an example TXU Energy bill.
(source: TXU Energy)
On the far right side of the bill, you can see the “billed usage” of 1,041 kWh, which is the amount of energy used within the billing period. At the bottom of the bill, you can see the final payable amount, notated as “current charges,” which is $163.02. To calculate the effective rate for this plan, simply divide the bill amount by the kilowatt-hours consumed. Here, that looks like this: $163.02 ÷ 1,041 kWh = $0.1566 per kWh, making the effective rate 15.66 cents per kWh.
Components of Your Effective Rate
- Energy charge: The energy charge is the most basic component influencing your effective rate. You can find it on your plan’s electricity facts label (EFL).
- Transmission and distribution utility (TDU) delivery charges: In Texas, which has a deregulated energy market, you must pay utility delivery fees. Most utility companies charge a flat monthly fee and a rate per kilowatt-hour of usage. For example, Oncor Electric Delivery charges $4.23 per month and 5.2497 cents per kWh.
- Base charge: The base charge, which covers administrative costs, is a flat monthly charge that can range from $0 to $20 or more.
- Sales tax: Electric bills also come with sales tax charges. This addition is a minor component of the bill but does contribute to your effective rate.
- Other charges: Your effective rate may also include gross receipts, tax reimbursements or underground facilities charges.
- Usage-based discounts: Many Texas electricity plans also include usage-based discounts that can impact your effective rate — for good or bad, depending on whether or not you consistently qualify for the discount. Common “discount” plans include bill credit, time-of-use and tiered-rate plans.
This Public Utility Commission of Texas (PUCT) graphic shows key energy bill components.
Why Does My Effective Rate Change With Usage?
The biggest and most variable component of your effective rate is your total energy charge, which depends on how much energy you use in a billing cycle. When you use more energy, your total bill increases, but the effective rate per kilowatt-hour will typically decrease, as most other components of your bill remain fixed.
Let’s use the example TXU bill again. The final bill for 1,041 kWh is $163.02. If we increase the consumption to 2,000 kWh, the energy charges increase to 2,000 x 0.1010 = $202 instead of $105.14. This increases the final bill by $96.86, taking it to $259.88. That means the effective rate is $259.88 ÷ 2,000 kWh = $0.1299/kWh, or 12.99 cents/kWh.
This rate is lower than our previously calculated effective rate of 15.66 cents/kWh, which applied to a consumption of 1,041 kWh. Remember that this is a simplified calculation and that the delivery charge will also change by a small margin when your energy usage changes.
How Do TDU Charges Influence My Effective Rate?
TDU charges, or delivery charges, vary by utility company. TDU charges have two components: a flat charge and a rate per kilowatt-hour based on your energy usage. Since you cannot choose your TDU, you can’t control the fixed portion of the effective rate. However, it pays to be aware of the delivery fees, because they’ll impact your total cost every month. Like monthly base charges, the flat delivery fee divides across your kilowatt-hours of usage. More energy used means the flat fee has less of an impact. Fewer, and it accounts for more of your effective rate. However, because this is a relatively small flat fee, it shouldn’t have much impact on.
Can Bill Credits Lower My Effective Rate?
Your effective rate can change significantly based on your energy usage if you have a bill credit plan. These plans offer a specific credit amount if you achieve a certain energy consumption threshold. For example, a bill credit plan may offer a $100 credit if you cross 1,000 kWh of consumption in a billing month.
In this case, the $100 will lower your total energy bill and, thus, your effective rate per kilowatt-hour. This rate decrease is why the advertised rates for bill credit plans look so cheap — providers always advertise the effective rate, assuming that the user will unlock the credit.
However, bill credit plans typically have a higher energy charge and can result in a very high effective rate if you don’t meet the energy consumption requirements for the credit. For instance, take a look at the snapshot of a bill credit plan offered by 4Change Energy.
The advertised rate for this bill credit plan is 10.7 cents per kWh, but that rate only applies if your home consumes 1,000 kWh and you secure the bill credit. If you use less energy — even 999 kWh in a given month — you’ll pay the regular energy charge of 14.9551 cents per kWh. Add in the TDU delivery fees, and your rate will be well over 20 cents per kWh. That’s more than double the advertised rate.
Because of this, we generally recommend against choosing a bill credit plan, even though it can reduce your effective rate. However, if your home’s monthly usage consistently meets the bill credit requirements, you may be able to secure a low effective rate from a bill credit plan. Be careful to review the EFL before signing up for a plan with a bill credit.
Hidden Fees and Their Impact on Effective Rates
Many electric plans include fees in the fine print, which can add to your electric bill and increase your effective rate. For example, some providers charge an early termination fee (ETF) if you switch providers before your contract ends. Another example is a disconnection fee a provider will charge if it needs to switch off your power due to unpaid bills. It’s important to read your EFL carefully to make note of all possible fees and penalties.
Comparing Effective Rates Across Plans
Because advertised rates aren’t the most accurate way to estimate your monthly bills, we recommend comparing the advertised rate to the provider’s energy charge and the utility company’s delivery fees. Seeing how these charges differ can help you identify plans that have deceptive advertised rates versus plans that have transparent energy costs. Finally, review your home’s regular energy usage and see how it compares to these rates. Comparing your usage to both the advertised rate and the separate energy charges and delivery fees can provide a more realistic idea of what your energy costs may be each month.
