Cost Avoidance and Rate Schedule Adjustments

Cost Avoidance values can be significantly affected by the nuances of current utility rate schedules. To understand this better, consider the relationship of Average Unit Price (Average Unit Cost) and Marginal Unit Price.

The current average unit price is simple to calculate and easy to understand. It is the current total cost divided by the current total usage. For example, if your current electric bill was $10,000 and you used 100,000 KWH, the average unit price was $.10/KWH.

Although simple to calculate and understand, the average unit price is not an appropriate way to calculate Cost Avoidance in many situations. Many rate schedules, particularly electric rates, have declining pricing tiers. You may pay $.15/KWH for the first 1,000 KWH and then the price declines to $.11/KWH for the next 24,000 KWH and then $.08/KWH for all KWH above 25,000. That means that if you reduce your usage from 100,000 KWH to 95,000 KWH, the 5,000 KWH saved are valued at $.08/KWH and not $.11/KWH or $.15/KWH. The marginal unit price – the price of one more or one less KWH at the top of a tiered rate schedule – is $.08/KWH.

Electric bills also typically include a demand charge for the peak KW usage recorded for the billing period. In some utility service areas the KW demand charge can be up to 50% of the total cost of the bill; therefore it can often be important to include demand values in the cost calculation.

Energy accounting standards specify that pricing methodologies must take into account all elements of cost (energy, peak demand, etc) and account for incremental/marginal rates. EnergyCAP allows you to use average unit price as well as marginal unit price, depending upon the degree of precision desired.