Having studied the various factors affecting tariff settings for power generation companies, we will now take a look at the significance of these factors in determining the actual rates or electricity or tariffs.
Economies of scale come into play in every segment of business and this is true even for electric power generation. We studied about the diversity factor and demand factor in our previous articles. Since the power supply company has to extract the costs of production and distribution from the people they supply electricity, they would be in a position to offer competitive rates to consumers if they can use the same electricity to supply a large number of people.
As we already discussed that the demand factor gives an idea of the percentage or proportion of power which is actually required compared to the total power which could be demanded, it is better for the company if it is as low as possible. Similarly the diversity factor should be as larger than unity as possible for the company. This in effect means that the company can have a large number of customers since it knows that all of them will not ask or demand for power at the same time. Hence it can keep its rates lower by spreading the costs over the large customer base.
On the other hand if the customer base is relatively small, the company would have to extract all the costs and the profit from them meaning thereby that the cost per unit of electricity would have to be quite high.
