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How to understand your energy bill

Take control of your electric and gas costs by understanding the charges and discovering ways to save.

If you want to keep your energy costs within your budget, learning about your charges and how they’re calculated is a crucial first step. Most energy bills break down your fees per month but use terms that can be unfamiliar to many homeowners. Manage your monthly energy expenses by familiarizing yourself with these terms and how they can affect your bill.

Your electricity bill: Rates, fees and how it’s calculated

Understanding your electric charges starts with discovering how much energy you’re using every month and how it’s calculated. These charges vary between suppliers, but here are some of the most common.

Kilowatt hours and rates

There are a few definitions you’ll need to familiarize yourself with to fully understand the charges on your electric bill.

  • A kilowatt is a unit of energy used to measure electricity and is equal to 1,000 watts.
  • Kilowatt hours (kWh) is the amount of electricity you consume in your home in a month. One kilowatt hour is equal to the amount of electricity used by a 100-watt light bulb burning for 10 hours.
  • Your kWh rate is the amount your provider charges for the electricity you consume. This rate varies by state and your retail provider or utility company.

On your electricity bill, your provider takes your consumed energy in kWh and multiplies it against your rate to calculate your power supply charges. This represents how much it cost for the energy you consumed during your service period — usually the span of one month. Power supply charges are typically listed near the top of your bill, often as the first charge.

Your kWh rate is structured in one of three ways:

  • A fixed rate is locked in and doesn’t fluctuate much, if at all, over a set period. It creates a more predictable bill and is easier to budget.
  • A variable rate changes with market demands and can save you money when prices are low but costs more when they rise — which can be more difficult to budget.
  • A hybrid rate, sometimes called a combination product, allows you to lock in a portion of your consumed energy at a fixed rate and the rest at a floating rate that changes with the market. These products are most often used by businesses.

Charges and fees

Besides the power supply charges, there are a few other common fees to expect on your monthly bill.

  • Delivery charge, sometimes called a transmission charge, is the fee for delivering electricity from regional power generators to your local distribution system.
  • Distribution charge pays for the delivery of electricity from the local distribution system to your home, including the maintenance of local poles and wires.
  • Operations and Services charge covers the cost of skilled employees who operate and maintain your local power system and provide customer service assistance. Some providers combine this charge with the Distribution charge.

Taxes

The tax percentage on your electric bill varies by state. For example, sales tax for utilities in Michigan is 4% for residents and 6% for businesses. Some organizations are exempt from taxes on energy bills, including religious, educational, scientific and charitable.

Most suppliers break down taxes clearly on a bill or within total monthly charges. In a breakdown of your costs, taxes are typically shown as the final charge before the total.

Other fees

Some states have mandated surcharges to help cover the costs of energy waste reduction programs or low-income assistance relief. These surcharges will often appear toward the bottom of your bill before taxes are calculated.

Callout: Electricity averages for household items

Wondering where the bulk of your electric bill is coming from? Generally, appliances that create heat — such as a clothes dryer, oven or space heater — use the most electricity in a standard residential home. Outdated appliances can also add to your charges.

Household itemHours used per dayCost per month
17″ Laptop8$2.81
Electric stove2$12.08
Refrigerator (Energy Star rated)24$2.90
Refrigerator (era 1980s)24$16.67

Your natural gas bill: Rates, fees and how it’s calculated

Natural gas is often used to heat your home and hot water tank, as well as some stoves, fireplaces and clothes dryers. While some charges are similar to your electric bill, others are specific to natural gas consumption.

Price per therm

Natural gas is billed in therms. A therm is a measurement of heat equivalent to 100,000 BTUs (British Thermal Units) or 100 cubic feet of natural gas, according to the US Energy Information Administration.

The rate you pay per therm varies depending on demand, your location and whether you use a retail provider or utility company. To calculate your bill, your provider takes your natural gas consumption for the month and multiplies it by your rate. This charge is typically listed near the top of your bill, often as the first item.

Charges and fees

Besides the gas you consume every month, there are other common fees you can expect to see on your bill.

  • Distribution charge pays for the transmission of gas from a storage field to the customer’s residence or business.
  • Balancing charge ensures that the delivery systems for natural gas maintain the correct pressure so gas can be delivered to customers.
  • Customer service charge covers the cost of servicing and maintaining your account, including meter readings and customer assistance when you have a question or issue with your natural gas.
  • Revenue decoupling charge is a mechanism designed to break the link between the amount of gas a utility company sells and its revenue. This fee can be a charge or a refund depending on how much gas the utility company sold the previous year.

Taxes

Taxes on your gas bill are usually calculated the same way as on your electricity bill. Your state or local governing body sets the tax percentage. For example, the state of Texas does not impose sales tax on residential gas consumption, but several cities within the state do.

Taxes are calculated at the end of your bill and often appear as the final charge before the total.

Other fees

Like your electricity bill, some governing bodies impose mandatory environmental or charity fees on your gas bill. These fees help pay for programs that assist low-income, retired or disabled residents with covering their energy bills, while others contribute to programs that lower our carbon footprint.

Getting the best energy rates

Select states across the US have introduced deregulated energy, allowing consumers to purchase their energy from retail providers rather than utility companies. Since this creates a competitive market, some companies can offer a lower rate overall, potentially saving you on energy costs.

However, studies have shown that a retail provider isn’t always the best choice. For example, residential retail consumers in Maryland paid nearly $400 million more on energy bills from 2015 to 2019 than had they gone through a utility company. As always, do your research to determine if deregulated energy best suits your needs.

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Other ways to save money

Weatherizing your home can lower your utility bills by up to 10%, according to DTE Energy. A registered energy auditor can inspect your home, estimate your energy usage and efficiency and identify problem areas.

Some typical suggestions from energy audits include:

  • Adding more insulation. The US Environmental and Protection Agency estimates that homeowners could save as much as 15% on heating and cooling by adding insulation to their home’s crawl space, attic and basement.
  • Upgrading your windows. Heat gain and loss through windows is responsible for up to 30% of residential heating and cooling energy use, according to the US Department of Energy.
  • Replacing old appliances. Energy Star is a government-backed symbol for energy efficiency, and replacing your old appliances with newer models featuring this label could earn you rebates and savings over time.
  • Improving ventilation. Make sure rugs and furniture aren’t blocking vents or registers so your home can heat and cool more efficiently, and utilize ceiling or exhaust fans to help with circulation.
  • Installing a newer HVAC system. Older furnaces convert 70% of energy to heat on average, while newer models are as efficient as 97%.

More guides on Finder

  • What is deregulated energy?

    The deregulated energy market offers opportunities for consumers and businesses to purchase the energy that powers their homes directly from suppliers.

  • How to switch energy suppliers

    Flip the switch on your utility company with a new energy provider. Here’s how.

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