What are Tiered Utility Rates?

Understanding your utility bill can be complex — especially when it comes to pricing. One of the key elements that can significantly impact your monthly expenses is the concept of tiered utility rates. While these rates are designed to promote energy conservation, they can also lead to surprisingly high bills for those who consume more electricity.

However, there’s good news for homeowners looking to mitigate these costs: solar energy offers a powerful solution. A custom home solar panel system can help homeowners reduce their dependence on utilities. This can translate to significant monthly savings that stack up.

There are different types of tiered electric rate systems. The most prevalent system today is the inverted tier system. Under the inverted tier system, the cost of electricity increases the more a customer uses.

The first tier — typically covering essential usage — is charged at the lowest rate. Many utilities call their first tier the baseline tier. As consumption exceeds this tier, the rate increases for the next level of usage and so on. This pricing model is designed to encourage energy conservation by making higher consumption more expensive.

While tiered utility rate pricing is common, it varies by utility company. Utility providers with tiered pricing systems may have different numbers of tiers, consumption amounts and costs of electricity for each tier. Consult with your utility company to determine if you’re under a tiered utility pricing system.

• Tier 1: 0-500 kWh at $0.39 per kWh
• Tier 2: 501-1000 kWh at $0.42 per kWh
• Tier 3: 1001+ kWh at $0.50 per kWh

A household that uses 800 kWh in a month would pay $195 for the first 500 kWh and $126 for the next 300 kWh, totaling $321. In contrast, a household using 1200 kWh would pay $195 for the first 500 kWh, $210 for the next 500 kWh and $100 for the remaining 200 kWh, totaling $505.

This model is particularly effective during peak demand periods, such as hot summer months, when energy usage tends to spike. It also helps utility companies manage demand and reduce the need for additional power generation capacity, which can be costly and environmentally detrimental.

Yes, there are other pricing systems for electricity. Not all utility companies offer tiered pricing. Many utility companies may offer different pricing options for their customers. For example, Pacific Gas & Electric (PG&E) offers tiered pricing and Time-of-Use (ToU) pricing plans.

Other pricing systems may include:

• Time-of-Use (TOU) Rates: Prices vary based on the time of day, with higher rates during peak demand periods and lower rates during off-peak times. This encourages users to shift consumption to off-peak hours.
• Seasonal Rates: Rates change with the seasons, reflecting the higher costs of electricity production during peak seasons like summer or winter. Though many tiered rate plans may have changing seasonal rates.
• Demand Rates: Charges include a fee based on the highest level of power used during a billing period, in addition to a per-kWh charge. This structure is common for commercial and industrial users.
• Real-Time Pricing: Rates fluctuate based on real-time market conditions and demand, providing dynamic pricing throughout the day.
• Fixed Rates: Customers pay a set amount each month, regardless of usage, which helps with budgeting but may not reflect actual consumption.
• Flat Rates: A single rate per kilowatt-hour (kWh), regardless of consumption levels. This simple structure doesn’t incentivize energy conservation.

Additionally, the Los Angeles Department of Water and Power (LADWP) — which serves the City of Los Angeles and a few neighboring communities — offers a tiered pricing plan.

The E-1 plan’s first tier — or “Baseline Allowance” — costs the least per kWh. The Baseline Allowance is an allotment of energy based on your address, heating source and season. PG&E’s summer pricing runs June 1 through September 30; its winter pricing runs from October 1 through May 31.

Once a household exceeds its Baseline Allowance, additional electricity is charged at a second tier rate during the monthly billing cycle.

SCE offers a two-tiered pricing system for its customers, known as the Tiered Rate Plan (Schedule D). Customers begin on its Tier 1 rate, which is the lowest price per kWh. If customers use more than the baseline tier, electricity will be charged under its Tier 2 rate. Different regions in SCE’s service map have different baseline allocations based on climate conditions and other factors.

Customers on the Standard DR plan start out with Tier 1, the lowest priced energy. Once a household uses 130% of their baseline allowance, the household moves to the higher Tier 2 pricing for the remainder of the billing cycle.

For homeowners, tiered utility rates can have significant financial implications. Those who consume more electricity, either due to larger households, high energy appliances, electric vehicles or air conditioning in warmer climates, may find themselves quickly moving into higher, more expensive tiers. 

This can lead to unexpectedly high utility bills, especially during peak usage months. Additionally, tiered rates can create financial strain for households that rely on consistent and substantial energy use, making budgeting more challenging.

This can help them stay within the lower, less expensive tiers or even eliminate their need to purchase electricity from the grid altogether during peak sunlight hours. As a result, solar homeowners can enjoy substantial savings on their utility bills, making their investment in solar energy even more valuable.

Enact designs custom home solar systems for our customers based on their home and energy needs. Our team can help you reduce your reliance on the utility grid and save money every month.

Regardless of the electricity tariff you are on, solar offers immediate and — as electricity rates rise — increasing financial benefits. As your panels generate clean electricity from sunlight, your home will use less electricity from the utility company.

Our team of experts will guide you through the process, from assessing your energy needs to designing a customized solar system that maximizes your savings. Using our award-winning solar software, an Enact energy advisor will design a custom solar proposal based on your home and energy needs.

After we find the right solar system for your home, you have access to a wide variety of payment and financing options. Enact will partner with a vetted installer in your area and coordinate the installation and permitting process. Our customers get updates every step of the way. To get started, schedule a free consultation with an Enact energy advisor and receive a free custom proposal.