Time of Use Electricity Rates

There are a growing number of U.S. electric utilities that offer time-of-use rates where the rates for using electric energy will vary by the time of day, the day of the week and/or by the season. Varying frameworks and criteria based on regional and utility-specific considerations are used to design these programs to encourage more desirable usage patterns and especially to reduce electricity demand at peak periods.

Elements of Typical Time of Use Rate Designs

Most residential electric customers still pay electricity rates for their power using  a uniform per kilowatt-hour basis. The most common approaches are the classic “declining-block” structure of rates where the per-kilowatt hour charge is generally constant at a general level of usage but it also declines as the customer’s usage reaches certain thresholds each month. For example, a uniform rate may exist for the first 500 kilowatt-hours of usage, followed by a lower rate for all usage in excess of this threshold. Although this approach is historically consistent with actual customer costs and therefore traditional rate design principles, it clearly encourages usage rather than conservation and it does not distinguish the time of use in pricing.

With the increasing emphasis on electric utilities to promote energy efficiency and reduce peak load, the idea of a more dynamic pricing model is gaining traction. The continuing development and improvement of smart meter technology is paving the way for differentiating rates based on time of day and the data and computational ability to make it a reality now exists. Most typically, utilities are gravitating to the following structure:

• Pricing varies for “on-peak” and “off-peak” time periods where the cost model is designed to drive energy consumption to “off-peak” periods. This off peak pricing will become especially important in those areas where all electric cars or plug-in hybrid electric vehicles (PHEVs) become prevalent because charging will be most attractive for both the utility and the customer during off-peak periods.
• The time frames that define these time periods tend to be seasonal as a typical “on-peak” time period for the summer is between 10:00 AM and 9:00 PM, where the winter “on-peak” times may start earlier with a break in the middle of the day (regional-specific).
• There is usually some differentiation between weekdays, weekends and common vacation periods.

In designing these plans, the electric utilities are mindful to keep them as simple as possible, offer enough of a price spread to drive the desired behavior, and yet balanced with empathy for those customers whose schedules may not afford them the flexibility to significantly alter their routines.

The Customer View

From the customer perspective, there are a number of factors to assess before opting for this type of a program:

• Determine your energy consumption on a monthly basis to assess whether any flat monthly fee for program participation is cost-effective.
• Assess the consumption levels of each of your major appliances as well as the level of flexibility you will have in using them (e.g. a refrigerator offers virtually no flexibility as compared to an electric dryer).
• Determine your tolerance for inconvenience (i.e. willingness to make the changes in routine that drive energy consumption usage patterns).
• The ability to drive high usage load (e.g. PHEV’s and air conditioning) into off peak periods.

Why Bother?

This potential partnership between the electric utilities and their customers deals directly with the fact that power cannot be stored – it’s either used or lost. And though the peak season must be supported (requiring additional generating capacity), the off-peak season results in excess capacity and less revenue for the electric utility. So rather than incur the added costs of building and maintaining additional generation (which also has an impact on the environment), all parties potentially win when energy costs vary with demand.