Deciphering the Fuel Charge on Your Electric Bill

When reviewing your monthly electric bill, you may notice a line item called a “fuel charge” or “fuel adjustment.” This extra fee can be confusing for customers who don’t understand what it’s for. If you’ve asked yourself “why is there a fuel charge on my electric bill?” this article will provide answers.

We’ll explain what the fuel charge covers, how it’s calculated, and why it fluctuates. Read on to gain insight into this surcharge so you can better comprehend your electricity expenses.

What is a Fuel Charge?

In simple terms, a fuel charge represents the cost for the fuel used to generate electricity. Fuel is needed to operate power plants and produce kilowatt-hours of electricity.

The main fuels used are:

• Natural gas
• Coal
• Oil
• Nuclear

As you can imagine, the prices of these fuels rise and fall. But rather than repeatedly changing the base electricity rate each time fuel prices change, utilities use a fuel charge.

How is the Fuel Charge Calculated?

The fuel charge passes through the actual fuel costs to produce electricity. Here is how it is calculated:

• The utility tracks how much fuel is used and what they pay for it.

• They divide the total fuel costs by the number of kilowatt-hours used during the same period.

• This determines the fuel cost per kWh – the fuel charge rate.

• The rate is added to each customer’s bill based on their kWh usage.

So if fuel costs rise or drop, the charge per kWh is adjusted up or down accordingly. The calculation may be done monthly or quarterly. More frequent adjustments pass through real-time costs.

Why Does My Fuel Charge Fluctuate?

Since the fuel charge is directly tied to actual fuel prices, it can swing up or down from month to month. Here are some of the factors that cause fluctuations:

• Market prices of natural gas, coal, oil and uranium

• Demand for electricity increasing or decreasing

• Changes in which power plants are used to meet demand

• Outages or limitations of power plants or transmission lines

For example, a hot summer month may drive up demand for electricity for air conditioning. This could force the use of more expensive “peaking” power plants, raising fuel costs and your fuel charge.

The fuel mix being used also impacts the charge. Producing electricity from coal or natural gas has different fuel costs than nuclear or renewables.

Example of How the Fuel Charge Works

Let’s look at a simplified example:

• In June, a utility’s total fuel cost was $1 million to produce 100 million kWh.

• So the fuel charge rate is $1 million / 100 million kWh = 1¢ per kWh.

• In July, customers used 120 million kWh to meet higher air conditioning demand driven by hot weather.

• The utility’s fuel cost also increased to $1.2 million due to the increased output.

• The fuel charge is now $1.2 million / 120 million kWh = 1¢ per kWh.

So the customer pays 1¢ extra per kWh used based on the actual fuel costs that month to meet demand.

Reasons Utilities Use Fuel Charges

There are a few key reasons why utilities use fuel adjustment charges:

• They allow actual fuel costs to be passed through directly to customers.

• They reduce the need to request rate increases when fuel prices rise.

• They allow utilities to recover the fluctuating costs of providing electricity.

• When fuel prices drop, customers immediately benefit from lower charges.

So while the constantly changing charge can be frustrating, it does reflect real-time expenses utilities incur to purchase fuel and operate power plants to meet demand.

Ways to Offset Higher Fuel Charges

If your electricity bill is rising due to fuel charge increases, here are some tips to offset the costs:

• Reduce energy use to lower your kWh so the charge has less impact.

• Shift discretionary electricity use to times when rates are lower.

• Look into budget billing plans so total costs are more consistent.

• See if your utility offers special rates or rebates you can take advantage of.

• Improve your home’s efficiency with things like weatherization, LED lights, and EnergyStar appliances.

The fuel charge makes up just one part of your total electric bill. But understanding what drives it and taking control of your usage can help minimize the impact of fluctuations.

The Bottom Line on Fuel Charges

While fuel charges can be confusing and unpredictable, they serve an important purpose – reimbursing utilities for the varying cost of the fuels needed to power our homes and businesses.

Knowing the origins of the charge and steps you can take to reduce your exposure are key to managing electricity costs. Carefully monitoring your usage and controlling what you can will provide the best defense against rising fuel expenses.