Should We All Prepare for Time-of-Use Electric Rates?
by Bob Shively, Enerdynamics President and Lead Facilitator
The cost of providing electricity to consumers varies widely based on the time of day that a consumer uses the power. Providing power at a time when plentiful low-cost generation is available can cost the energy-provider close to zero, while power provided at peak times may cost significantly more than the provider is charging the customer. For example, here is a graph of PJM prices for Chicago compared to the purchased electricity charge the local utility ComEd applies to customers:
Prices for August 8, 2022
Energy companies historically have applied flat rates (meaning rates that stay the same for all hours of the day) to most customers. This was done for simplicity and, until the widespread installation of smart meters, because billing data was not available for more sophisticated rate structures. Meanwhile, economists have long contended that energy companies are giving their customers inefficient price signals. If customers pay the same for power at 5 a.m. as they do at 5 p.m., there is no motivation for customers to care about when they use power.
As more and more renewables with zero marginal costs of production replace traditional power plants, prices are expected to become increasingly variable across the day. Systems with large amounts of solar power will expect prices to drop significantly in mid-day with high prices in the evening as the sun goes down and expensive flexible power plants must ramp to meet the evening system peak demand. Below is graph of real-time prices in the California ISO, which has a high penetration of solar power. Note that prices in the middle of day approach zero.
Prices for August 7, 2022
In recent years it has become common for energy companies to offer customers the option of moving to rates called “time-of-use”, “time-of-day”, or simply “TOU”. These are rates that change for various time periods across the day. More recently some utilities such as the City of Fort Collins, Pacific Gas and Electric, Sacramento Municipal Utility District (SMUD), San Diego Gas and Electric, and Southern California Edison have gone to mandatory time-of-use rates for all customers. Here is an example of SMUD’s rates residential rates approved in 2022:
Once smart meters are in place, the biggest barrier to TOU rates is the issue of customer acceptance. Many feel they are difficult for customers to understand, or customers don’t want to deal with complexity. Others believe they are unfair because most customers can’t change their usage patterns. But initial returns from utilities with TOU suggest customers can figure out strategies – shifting flexible loads such as clothes washing and drying, cooling their houses down prior to the peak period in summer and then pulling their shades, using timers on hot-water heaters and electric vehicles, among others. In some markets with especially high rates such as Hawaii, customers have even found that controllable home batteries coupled with solar become economic when combined with TOU rates.
So what can we conclude as we transition to low-carbon grids? We will likely find it beneficial to pay more attention to when we use energy and to start developing strategies to gain greater control over our use of electricity. At some point, time-of-use rates are likely coming to your utility if they haven’t already.