Data last updated
Across the country, utilities are beginning to introduce innovative rate structures for residential energy consumers. These rate structures–from time-of-use rates to demand charges to real-time-pricing–all have a common goal: to incentivize customers to consume energy during times when the cost of generating electricity is cheap, and to disincentive energy consumption when the cost of generating electricity is high. As a result, understanding the ins and outs of a time-of-use rate can help you reduce your monthly cost of energy.
How do time-of-use rates work?
Time-of-use rates fall within a broader category of innovative utility rate structures that adjust the rate you pay for electricity over the course of the day. These types of rate structures, commonly referred to as time-varying-rates, frequently follow a similar pattern. At times when both the cost of generating electricity and demand for electricity are low (i.e. in the middle of the night), the rate paid to use electricity is very low. However, at times when both the cost of generation and demand for electricity are high (i.e. the afternoon of a hot summer day), the rate of electricity is much higher.
Time-of-use rates may vary by season, on weekdays versus weekends and holidays, and across multiple periods over the course of an individual day. For instance, Pacific Gas & Electric’s (PG&E’s) summer time-of-use rate for small businesses has three separate periods: an off-peak period from 9:30 pm through 8:30 am, a partial-peak period from 8:30 am to noon and again from 6 pm to 9:30 pm, and, finally, an on-peak period from noon to 6:30 pm.
Why are time-of-use rates necessary?
The goal of time-of-use rates is to better align the costs that electricity consumers see with the actual cost of producing electricity. At present, most utilities update their residential electricity rates once or twice a year. That rate, expressed in dollars or cents per kilowatt-hour ($/kWh), is intended to cover the entire cost of generating the electricity that consumers use.
However, a utility’s cost of electricity changes throughout the course of the day for various reasons. Traditionally, as demand for electricity increases throughout the day, so too does the cost of generating that electricity. Without a time-varying electricity rate, residential consumers have no window into how the cost of electricity rises and falls each day.
This is where time-of-use rates can add transparency: by adjusting the rate across the course of the day, week, or month, you can better understand what the true cost of the electricity you use is. With the knowledge of when costs are both higher and lower, you can begin to lower your overall electric bill by adjusting when you use electricity.
Comparing a time-of-use rate bill to a standard bill
A standard electricity bill is straightforward to calculate: by multiplying the rate you pay for electricity by the amount of electricity you’ve consumed in a month, you can easily arrive at your monthly bill.
A time-of-use bill is a bit more complex to calculate but follows a similar process. Instead of multiplying your total monthly usage by your single electricity rate, you now must multiply the amount of electricity consumed during certain hours of the day by the rate specific to those hours. In practice, these differences mean that some customers may see immediate savings on their monthly electric bills without changing their behavior, while others will see increased bills without adjusting their electricity usage habits.
Making the most of time-of-use rates
There are a number of ways to make the most out of a time-of-use rate. The simplest, and easiest to implement, is to use your appliances during the hours when electricity is least expensive. For customers who take the initiative to shift consumption habits, even slight changes could produce visible savings.
In fact, for residential customers on PG&E’s time-of-use rate, if you run your dishwasher 20 times a month at 9 pm instead of at 6 pm, you could save $70 per year on electricity costs!* Repeat this process with other household appliances, such as your washer and dryer, and the savings begin to add up quickly.
Another great way to decrease your exposure to peak pricing on time-of-use rates is to invest in solar, and even more so to invest in solar-plus-storage. Many time-of-use rates have the highest cost in the middle of the day when your electricity consumption could be offset by electricity produced by a solar system on your property. Even if you’re not home in the middle of the day, you can invest in a home energy storage system to ensure that more of the energy you consume in the evenings comes from the sun and not from the grid even when time-of-use rates remain high.
TOU rates can be a complicated metering practice, so if you’re curious about some of the key points to understand, check out our video on how time-of-use works at a high level:
To explore if solar is right for your house, register for the EnergySage Marketplace to receive up to seven free quotes from local, pre-screened solar installation companies.