Tiered Electricity Rates: Why Your Last 100 kWh Can Cost Double Your First 100

If your utility uses a tiered rate structure — sometimes called an inclining block rate — the price on your bill for "electricity" isn't actually one number. It's several, stacked on top of each other as your usage climbs through the month, which means the true cost of your last 100 kWh can be meaningfully higher than the cost of your first 100. This is especially common in parts of the West and among utilities that want usage-based pricing to encourage conservation.

How a tiered structure is built

Instead of one flat rate applied to every kWh, the plan divides monthly usage into blocks (tiers), each priced higher than the last:

| Tier | Usage range (illustrative) | Rate per kWh (illustrative) | |---|---|---| | Tier 1 (baseline) | 0–500 kWh | $0.22 | | Tier 2 | 501–800 kWh | $0.29 | | Tier 3 | 801–1,200 kWh | $0.38 | | Tier 4 (high usage) | 1,200+ kWh | $0.48 |

The exact tier thresholds and rates vary enormously by utility, state, season, and even climate zone within the same state — the table above is illustrative of the structure, not a specific utility's actual current rates. Check your own rate schedule for real numbers.

A worked example: why "average rate" is misleading

The situation: A household uses 1,000 kWh in a summer month under the illustrative tiers above.

| Tier | kWh in this tier | Rate | Cost | |---|---|---|---| | Tier 1 | 500 | $0.22 | $110.00 | | Tier 2 | 300 | $0.29 | $87.00 | | Tier 3 | 200 | $0.38 | $76.00 | | Total | 1,000 kWh | — | $273.00 |

The household's average rate for the month is $273 ÷ 1,000 kWh = 27.3¢/kWh. But their marginal rate — what the next kWh they use would actually cost — is 38¢/kWh, since they're deep into Tier 3. If they ran a window AC unit enough to push into Tier 4, every additional kWh from that point would cost 48¢, not the 27.3¢ "average" their bill might suggest at a glance.

Why marginal rate is the number that matters for decisions

If you're evaluating whether an efficiency upgrade, a heat pump, or solar panels are worth it, use your marginal rate (the rate on your highest tier reached that month), not your average rate. A project that reduces usage enough to drop you out of Tier 3 or Tier 4 entirely can be worth significantly more than a simple average-rate calculation would suggest, because you're eliminating your most expensive kWh first.

| Approach | What it tells you | |---|---| | Average rate (total bill ÷ total kWh) | What you paid per kWh on average — useful for comparing month to month | | Marginal rate (rate at your highest tier) | What your next kWh costs, or what your last kWh saved you if you cut usage — the more relevant number for evaluating a specific efficiency or solar project |

Our Electric Bill Estimator and Solar Savings Calculator both let you enter a specific rate — for a tiered account, using your marginal rate rather than your bill's average will generally produce a more realistic estimate of what a usage-reducing project is actually worth.

Who tends to have tiered rates, and why

Tiered pricing is most common among utilities — particularly in states with strong conservation policy goals — that want the price signal itself to discourage high usage, on the reasoning that a rising per-kWh cost gives high-usage households a stronger incentive to conserve than a flat rate would. It's also more common in regions with hot summers, where the highest tiers are specifically designed to price in the cost of meeting extreme peak air-conditioning demand.

FAQ

Do tiers reset every month, or accumulate over the year? Almost always monthly — your usage resets to Tier 1 at the start of each new billing cycle, so a high-usage month doesn't carry a penalty into the next one.

Are tier thresholds the same in summer and winter? Often no — many utilities with tiered rates set different (often lower) tier thresholds for summer months, when air conditioning drives higher baseline usage, so a given kWh number can fall into a higher tier in July than in January. Check your utility's seasonal rate schedule.

How do I find my utility's specific tier structure? Your rate schedule (sometimes called a "tariff") is typically published on your utility's website, and your monthly bill often shows a breakdown by tier if your account uses this structure — look for a section listing multiple per-kWh rates rather than one flat number.

Does going solar help more with a tiered rate than a flat rate? Often yes — because solar typically offsets your highest, most expensive tiers first (the kWh you'd otherwise be buying at your marginal rate), the effective value of each kWh of solar production can be higher under a tiered structure than under a flat rate, depending on your usage pattern and your state's net metering rules.

Fact-checked against EIA electricity pricing data. Found an error? See our Corrections Policy.