How Electricity Bills Are Calculated
Avoid Hidden Fees and Unexpected Costs that come with some Electricity Plans! Knowledge is Savings!
Understanding how providers calculate your monthly electric bill allows you to look beyond the Advertised Prices and see how an electricity plan will apply to your specific situation. With this knowledge, you’ll become a savvy shopper and avoid the hidden and unexpected costs that can come with some electricity plans.
What We'll Cover
Electricity Plan Pricing Buckets
When calculating electricity bills, all cost-related items of an electricity plan can be broken down into three buckets.
Usage Charges
These charges are based on the amount of electricity you use, and are multiplied by your monthly kilowatt-hours (kWh). The more electricity you consume, the higher your usage charges will be.
There are two Usage Charges:
Provider’s Energy Charge
TDU Usage Charge
Fixed Fees
These are recurring monthly charges that you pay regardless of the amount of electricity you use.
There are two Fixed Fees:
Provider’s Base Charge
TDU Delivery Charge
Modifiers
These can change and fluctuate each month depending on various factors as defined in your contract. Modifiers can lead to inconsistent billing, so it’s important to understand how they work.
Examples:
Bill Credits
Minimums
Time of Use
The Two Steps of Calculating an Electricity Bill
Electricity bills are calculated in two steps:
- Step One: Providers calculate the cost associated with the Purchase and Delivery of Electricity.
- Step Two: Once they determine the initial cost, they then apply any applicable modifiers.
The first step applies to all electricity plans, while the second only applies to more complex plans with modifiers. Even though step two only applies to more complex plans, it’s important to note that the modifiers (e.g., discounts and credits) are only applied to your monthly bill if you meet the requirements for those discounts and credits.
Why This is Important
The key is to understand what you’re paying before any modifiers. That way, if you don’t meet the requirement for the discount or credit, which a lot of people don’t, you’ll know what to expect to pay. This is why most people are surprised when their first electric bill is higher than expected. They assumed they would receive the advertised price, not realizing they wouldn’t meet the requirements for that price.
Simple, straightforward plans are transparent—what you see is what you get, and the advertised prices are what you’ll pay. However, with more complex plans that include modifiers, your actual cost for electricity can be much higher, and you’ll only achieve the advertised price if you meet certain criteria. It’s crucial to understand your usage and other factors to ensure you qualify for the advertised rate; otherwise, you could end up overpaying for electricity.
Step One: Calculate Purchase and Delivery of Electricity
First, providers calculate the amount you owe for the electricity you used, then add the charges for delivering that electricity to your home. In this step, providers only use the “Usage Charges” and “Fixed Fees” buckets. This forms the basis of your electricity bill. If your plan is simple and straightforward, this calculation completes your bill, and no further action is taken.
Calculation: (Usage (kWh) * Usage Charges) + Fixed Fees = Monthly Bill
Usage Charges = Provider Energy Charge + TDU Usage Charge
Fixed Fees = Provider Base Charge + TDU Delivery Charge
Price Buckets of Step One
The two pricing buckets used in the first step of calculating your monthly bill are “Usage Charges” and “Fixed Fees.” These buckets cover the cost of purchasing electricity and having it delivered to your home.
Usage Charges
Provider’s Energy Charge: Priced in cents and charged per kilowatt hour (kWh) of electricity you use. This is the actual purchase price of electricity. Providers purchase electricity wholesale, and this is the retail price you’re paying the provider for electricity.
TDU Usage Charge: Also priced in cents and charged per kilowatt hour (kWh). This covers the cost of delivering electricity to your home.
Usage Charges: This is the combined total cost you’ll pay for each kilowatt hour of electricity you use. It combines the Provider’s Energy Charge and the TDU Usage Charge.
Calculation:
Provider’s Energy Charge + TDU Usage Charge = Usage Charges
Fixed Fees
Provider’s Base Charge: A flat fee billed each month regardless of how much electricity you use. Not all plans include a base charge, but for those that do, it’s typically less than $10. Generally, the higher the base charge, the lower the energy charge.
TDU Delivery Charge: A flat fee charged by the utility supplier. This covers administrative actions like reading your electricity meter and providing usage information to your provider.
Fixed Fees: This is the combined total amount of fixed fees you would pay each month, regardless of the amount of electricity you use.
Calculation:
Provider’s Base Charge + TDU Delivery Charge = Fixed Fees
Calculating Your Monthly Bill in Step One
Calculating the monthly bill in Step One is straightforward. The provider multiplies the “Usage Charges” by the number of kilowatt hours (kWh) you used, then adds the “Fixed Fees.” This forms the basis of your Monthly Bill.
If your plan is simple and straightforward, this calculation completes your bill, and no further action is needed. However, if your plan is more complex and includes modifiers, the process moves to Step Two.
Step Two: Apply Modifiers
Once your base monthly bill has been calculated, the provider checks for any modifiers that may apply. For example, if your plan has a minimum charge, they will verify whether your Monthly Bill from step one meets the minimum requirement. If your plan includes a bill credit, they will confirm whether your electricity usage qualifies for the credit, and if so, they will apply it to your monthly bill.
Price Bucket Components of Step Two
The price bucket used in the second step of calculating your monthly bill is “Modifiers.” This bucket will apply any modifications to your bill depending on the details defined in your electricity plan.
Modifiers
Bill Credits
For example, consider a plan that offers a $125 credit if you use 1000 kWh. If your usage meets or exceeds the bill credit trigger amount, the provider subtracts the credit amount from your monthly bill.
Calculation:
Monthly Bill – Bill Credit Amount = New Monthly Bill
Note:
- Usage Charges are typically higher on plans with Bill Credits.
- Notice how the New Monthly Bill fluctuates—you may end up paying more for 500 kWh than for 1000 kWh.
The key is to understand how your final monthly bill will be affected if you don’t receive the bill credit. Providers often rely on customers not meeting the credit threshold, which can result in overpaying for electricity.
Step One: Purchase and Delivery of Electricity
Step Two: Apply Modifiers
Time of Use (TOU)
A Time of Use (TOU) plan is when the Provider’s Energy Charge varies depending on the time of day.
For example, Free Electricity from 11 p.m. to 5 a.m. (off-peak time). Here, usage during free time is multiplied by the usage charges and then subtracted from the Monthly Bill.
Calculation:
Monthly Bill – (Off-Peak Usage * Usage Charges) = New Bill Amount
Step One: Purchase and Delivery of Electricity
Step Two: Apply Modifiers
Note: Most Time of Use plans assume 35-40% of your usage will be during the ‘off-peak’ time. From our research, we believe 25-30% is more accurate. The example above assumes 30%.
Minimums
For example, a Minimum Charge of $200 – In this example, the Monthly Bill is calculated first and then compared to the minimum charge amount.
- If Monthly Bill < Minimum: use Minimum
- If Monthly Bill > Minimum: use Monthly Bill
Monthly Minimum Plans typically have lower Provider Energy Charges.
This means that customers who use more electricity can benefit from these plans, while those with lower usage may end up paying more if their consumption falls below the minimum threshold.
Step One: Purchase and Delivery of Electricity
Step Two: Apply Modifiers
Texans can save up to
$500 per year
by switching to a new electricity plan
explore affordable plans in your area
Understanding Charges on your Electric Bill
Understanding how your electric bill is calculated is just the beginning—knowing the additional charges you might see on your Texas electricity bill is just as important.
Ever wondered where all those line items on your electric bill come from? Breaking down these charges can give you valuable insight into managing your energy costs more effectively.
In this section, we’ll walk you through the different types of charges you may encounter, empowering you to make informed decisions about your energy usage and plan selection.
We’ve also included a helpful guide from the Public Utility Commission of Texas (PUCT) and a sample bill explanation to make understanding your electricity bill a breeze!
The Public Utility Commission of Texas (PUCT) is a great resource for information regarding charges on your electric bill, but here we want to cover some of the most common items found on your electric bill.
Some of the charges we cover extensively on Texas Electricity Finder:
- Base Charge – A flat fee applied each month regardless of the amount of kilowatt (kWh) used.
- Energy Charge – A charge based on the electric energy (kWh) consumed.
- TDU Delivery Charges – Charge to cover the cost of moving electricity from the generation plant to your home, also known as “TDU Pass-Through Charges”
Other common charges you may see:
- Demand Charge – Charge based on the rate at which electric energy is delivered to or by a system during the billing cycle.
- Changes in Rates – Any change in the customer’s rates or charges due to the variable rate feature of the Terms of Service contract.
- City Sales Tax – Sales tax collected by authorized taxing authorities, such as the state, cities, and special purpose districts.
- PUC Assessment – A fee assessed to recover the statutory fee for administering the Public Utility Regulatory Act.
- Miscellaneous Gross Receipts Tax Reimbursement – A fee assessed to recover miscellaneous gross receipts tax imposed on retail electric providers operating in an incorporated city or town having a population of more than 1000.
For a complete list, visit the PUCT website.
In Closing
It’s important to understand how electricity bills are calculated so you can better assess how a plan will apply to your situation. If you’re considering a complicated plan with modifiers, you can now anticipate what the plan will cost if you don’t meet the criteria for the modifier.
In all cases, if you don’t meet the modifier’s requirements, you’ll end up overpaying compared to a simple, straightforward plan without any modifiers. Providers are aware of this and often use low advertised prices to attract customers, knowing that many won’t qualify for the discount.
Want to know more ways to Save? Check out our Tips and Ticks to be a Smart Electricity Shopper!
We gathered some of our most insightful tips to help you become a savvy shopper and avoid the pitfalls of choosing a costly plan when shopping for electricity in Texas.
Visit our Knowledge Center for more ways to become a smart electricity shopper.
If you found this helpful and think others could also benefit from reading it, share it!