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The utilities and several major environmental groups see time-of-use rates as a valuable tool to help clean up the state’s power supply. California has a growing abundance of cheap solar power during the middle of the day, so much that utilities sometimes have been forced to pay other states to take it. But the sun goes down every evening just as people get home from work, forcing utilities to fire up expensive, polluting gas plants.
Time-varying rates are meant to encourage homes and businesses to shift their power use away from high-demand periods, when energy is dirtier and more expensive, and toward low-demand periods when energy is cleaner and less expensive. For California’s three largest public utility companies SDG&E, SCE and PG&E pictured above, their “on-peak” time-of-use periods are now between 4 p.m. to 9 p.m., when energy costs are 60% more during summer weekdays.
Why Are There Peak and Off-Peak Hours?
Under a TOU rate, customers pay different prices per kilowatt hour (kWh) of electricity that they use, depending on when they use it. Pricing varies by time of day and can also vary based on the day of the week (weekend or weekday) and the time of year. TOU rates are characterized by different prices between “peak hours” and “off-peak” hours and the exact details of a customer’s TOU rate will depend on the specific rate plan offered by their electric utility.
Electricity costs more during certain designated “peak hours” for customers on a time of use rate plan. These hours are typically selected to coincide with the times when the demand for electricity is greatest (often in the late afternoon/early evening and the summertime). Solar is abundant during the middle of the day, when people are using the least amount of energy, but it’s effectiveness drops off as the sun goes down and power usage goes up.
The Economics and Future of Time-of-Use Electricity Usage
One reason for peak pricing is because utilities must have additional energy generation resources available to meet the needs of the grid during limited times when energy demand is highest. By pricing electricity higher during times that typically have the highest demand, TOU rates are intended to provide price signals that encourage customers to shift their energy usage to other periods.
Time-variable rate programs are already offered on a voluntary basis in nearly every state. Although participation in voluntary TOU programs has been low to date, as many states consider efforts to modernize the electrical grid and reduce peak energy consumption, TOU rates (and other related time-based rate structures) may become increasingly prevalent. There are multiple approaches that utilities take when it comes to time-varying energy costs, but TOU rates are one of the most common.