Over the years Electric bills have gotten more complicated. It is important to understand how you are being charged for your electricity, especially if you are trying to calculate your payback on installing solar.

There are still some electric companies that have an old school, simple approach to billing. They add up how many kilowatt hours (kwh) you have used that month and they bill you a set amount per kwh. If this is your electric company, congratulations! Your bill is easy to understand. But on a “tiered” or “TOU” billing system things get a little trickier.

If you are on a “tiered” electric rate, you will see different dollar amounts per kwh which can get a little confusing. The concept behind this type of billing is that the electric company will charge you a reasonable amount for the first kwh that you use, but as you use more, they charge more.

It starts with a baseline amount of electricity which is decided by the electric company. For example, they may say that the baseline is 20 kwh/day. They will charge “Tier 1” price for this baseline electricity, in our example, we will say it is $.15/kwh.

Then the electric company will assign another amount of kwh which will be “Tier 2”, for example it could be another 30 kwh/day and those will be billed at the “Tier 2” price of $.25/kwh. Anything above that would be considered “Tier 3” pricing which could be as high at $.35/kwh. Sometimes there will be even more tiers than that but we will work with just three for this example.

So let’s say it is summer time and on day one of the month, you weren’t home so you set the air conditioning to 80 and you only used 45 kwh. On day two, you were home and it was hot out so your air conditioning was on full blast and you used 65 kwh. Day three was cooler so you only used 55 kwh. What would the electric company charge you on the tiered system for these three days?

Tier 1            Tier 2            Tier 3             Total
Day one:    (20 x $.15) + (25 x $.25)                         =  $9.25
Day two:    (20 x $.15) + (30 x $.25) + (15 x $.35) = $15.75
Day three: (20 x $.15) + (30 x $.25) + ( 5 x $.35)   = $12.25

Now, if you were one of the lucky people who has solar, how much do you save in a tiered billing system? The answer is a lot because the solar helps keep you out of the higher pricing tiers. Let’s look at this same electric bill but say that the solar produced 30 kwh each day. That means you will only be billed for 15 kwh for day one, 35 kwh for day two and 25 kwh for day three.

Tier 1            Tier 2            Tier 3             Total
Day one:    (15 x $.15)                                                = $2.25
Day two:    (20 x $.15) + (15 x $.25)                        = $6.75
Day three: (20 x $.15) + ( 5 x $.25)                          = $4.25

As you can see, the “Tier 3” charges completely disappeared which significantly reduced the overall bill.

Another type of billing common structure used by electric companies is called Time-Of-Use or TOU. The point of this billing system is to control when customers use their electricity. The electric companies usually experience the most stress on their system on summer afternoons, so they call that the “peak” time and charge you more per kwh for energy used during that time. Every electric company is different and some even allow customers to choose between different TOU rates, but a typical example would be something like $.35/kwh for power used on weekdays between 2pm – 8pm and $.20/kwh for power used at other times and on weekends. If you are paying attention, this pricing structure is a good incentive to do things like run your electric clothes dryer during the off Peak hours to save money on your electric bill.

If we go back to our previous example where you used 45 kwh on day one, 65 kwh on day two and 55 kwh on day three, we need to know when this power was used in order to determine the cost. Let’s say that these are all weekdays and on day one 15 of the 45 kwh was during peak time, on day two 30 of the 65 kwh was peak and on day three 25 of the 55 kwh was peak. Here is what that would look like.

Off Peak         Peak             Total
Day one:    (30 x $.20) + (15 x $.35) = $11.25
Day two:    (35 x $.20) + (30 x $.35) = $17.50
Day three: (30 x $.20) + (25 x $.35) = $14.75

When you install your solar, the energy it produces during peak times saves you more money. If it the air conditioning is on at 4pm and the solar is powering it, you won’t have to pay that high peak price for the kwh and generally speaking, the electric companies will credit you at the higher peak rate for solar that is fed into their system during peak times.

So, if we use the same solar generation of 30 kwh per day and say that every day was the same with 10 kwh of that generated during the peak time of 2pm – 8pm and the other 20 kwh generated during the off peak time, here’s what the electric bill would look like.

Off Peak         Peak             Total
Day one:    (10 x $.20) + (  5 x $.35) = $  3.75
Day two:    (15 x $.20) + (20 x $.35) = $10.00
Day three: (10 x $.20) + (15 x $.35) = $  7.25

If you faced your solar panels West, they would generate more power during those peak hours which would save you even more money.

The bottom line in all of this is that you should understand how your electric company is billing you, especially if you want to know how much money installing solar can save you.