Differential tariff is an example of demand side management where the price per unit of energy varies with the consumption. If a power utility uses differential tariff, it may change the rate per kWH of energy used during different times, such as raising the price during times of high energy consumption and lowering the price during times of low energy consumption. This helps balance the rate at which power is used and the rate at which power is created.
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Background
A differential tariff creates a balance in production and consumption of power by utilizing customer demand. For instance, if there is time where energy is being used faster than can be supplied, a differential tariff can be used: raising the price at that specific time to balance load on the system.
Differential Tariff
To implement the above-mentioned method of flattening the load curve, this technique is employed. As the load decreases and increases, the supplier must install his equipment in a way which will be capable of supplying the peak consumer load. During low periods, the equipment will be underutilized, thereby decreasing the energy efficiency of the equipment. Therefore the supplier will try to ensure that the equipment is used at its rated capacity so as not to waste resources, which cost money. With this type of tariff, the consumer will try to consume more energy during the low periods and avoid energy consumption during peak hours because they are more expensive.