Time of use

What Is Time of use?

Time of use (TOU) refers to a pricing strategy where the cost of a good or service varies depending on the time of day, week, or season. In the context of energy economics, particularly electricity, time of use rates charge different prices for electricity consumed during different periods, typically categorized as "peak," "off-peak," and sometimes "mid-peak" or "super off-peak" hours. This structure aims to reflect the variable costs of producing and delivering electricity, which are generally higher during periods of high demand. Time of use plans incentivize consumer behavior to shift usage away from high-demand periods, thereby promoting cost efficiency and better management of the energy grid stability.

History and Origin

The concept of time-of-use pricing dates back to the mid-20th century, as utility companies began exploring methods to manage electricity demand more effectively. Early implementations aimed to incentivize customers to shift their usage patterns, primarily to flatten the overall demand curve and reduce the reliance on expensive "peaking power plants." A significant push for time-of-use rates in the United States came with the passage of the Public Utilities Regulatory Policies Act (PURPA) in 1978. This act encouraged utilities across the U.S. to experiment with varying pricing schemes for electricity. Despite early trials, widespread customer adoption and significant demand reduction were not immediately realized. A major turning point occurred in the early 2000s, partly spurred by events like the California energy crisis, which highlighted the need for more sophisticated energy management. The subsequent rollout of smart grid technologies and advanced metering infrastructure provided the technical capability for more precise time-of-use tracking and billing, paving the way for broader implementation.⁵

Key Takeaways

Time of use pricing structures charge varying rates for a service based on the time of day, week, or season.
The primary goal is to encourage consumers to shift demand away from peak periods to off-peak times.
This pricing model is most commonly applied to electricity, reflecting the higher costs of generation and delivery during periods of high demand.
Time of use rates can lead to lower electricity bills for consumers willing and able to adjust their usage.
For utility companies, time of use helps manage peak demand, potentially reducing the need for costly infrastructure upgrades.

Interpreting the Time of use

Interpreting a time of use electricity plan involves understanding the defined periods and their corresponding rates. Utilities typically outline specific hours for peak demand, off-peak hours, and sometimes intermediate periods. Peak hours are when electricity is most expensive, usually corresponding to times of high consumer activity, such as weekday afternoons and evenings. Off-peak hours, often late nights, early mornings, and weekends, carry the lowest rates. By being aware of these time blocks and their associated costs, consumers can strategically plan their energy-intensive activities. For instance, running a dishwasher or laundry machine during off-peak times can significantly reduce the overall electricity bill. The effectiveness of time of use plans hinges on consumers' ability and willingness to adapt their energy consumption habits in response to these economic incentives.

Hypothetical Example

Consider a residential customer, Jane, who lives in an area with a time of use electricity plan. Her utility company defines the following rates:

On-Peak (Highest Rate): $0.35/kWh – Weekdays, 4 PM to 9 PM
Mid-Peak (Moderate Rate): $0.20/kWh – Weekdays, 10 AM to 4 PM and 9 PM to 11 PM
Off-Peak (Lowest Rate): $0.10/kWh – Weekdays, 11 PM to 10 AM, and all hours on weekends/holidays

Jane typically arrives home from work at 5 PM, cooks dinner, runs the dishwasher, and does a load of laundry. Under a flat rate, these activities might cost the same regardless of time. However, with time of use pricing, running her dishwasher and laundry at 6 PM (on-peak) would be significantly more expensive than running them at 10 PM (mid-peak) or after 11 PM (off-peak).

To optimize her costs, Jane might adjust her schedule:

She sets her dishwasher to run at 11 PM instead of 7 PM.
She shifts her laundry to Saturday mornings (off-peak) instead of weekday evenings.
She pre-cools her home before 4 PM and relies on energy-efficient fans during the on-peak window.

By strategically shifting approximately 20 kWh of consumption from on-peak ($0.35/kWh) to off-peak ($0.10/kWh) each month, Jane could save ((20 \text{ kWh} \times $0.35) - (20 \text{ kWh} \times $0.10) = $7.00 - $2.00 = $5.00) on her monthly electricity bill. While this is a small amount, consistent energy conservation through such shifts can lead to notable savings over time.

Practical Applications

Time of use pricing is primarily implemented by utility companies to manage electricity grids more efficiently. This model encourages demand response by signaling to consumers when energy is most expensive to generate. For instance, Southern California Edison provides various time of use residential rate plans, clearly outlining peak, off-peak, and super off-peak periods, with rates differing significantly across these times. This ⁴structure allows utilities to defer or avoid building new power plants, as it reduces the severity of peak demand spikes. Beyond residential use, time of use rates are also applied to commercial and industrial customers, often with more complex structures that can include demand charges in addition to energy charges. The adoption of smart meters has greatly facilitated the practical application of time of use rates, as they enable precise, hourly tracking of electricity consumption. This granular data allows both utilities to bill accurately and consumers to monitor and adjust their consumer behavior for greater cost efficiency.

Limitations and Criticisms

Despite the theoretical benefits, time of use pricing faces several limitations and criticisms. One significant concern is the potential for financial strain on households with limited flexibility in their routines. For families where members work during peak hours or have unavoidable energy needs during those times (e.g., cooking dinner, heating/cooling after school), shifting consumption may be difficult or impractical, potentially leading to higher bills compared to fixed costs or flat-rate plans. This ³can disproportionately affect lower-income households.

Another criticism revolves around the learning curve and complexity for consumers. Understanding and actively managing energy consumption based on fluctuating time of use rates requires a level of engagement and technological literacy that not all consumers possess. Studies have shown that consumer awareness of the actual price signals can be low, leading to limited behavioral response. The u²npredictable nature of monthly energy costs under time of use plans, compared to traditional flat rates, can also create financial stress due to difficulty in budgeting. Furthermore, the effectiveness of time of use in reducing peak load has been debated, with some research indicating that while households may reduce consumption during peak periods, the overall reduction in demand or load shifting to off-peak hours may be modest.

T¹ime of use vs. Dynamic pricing

Time of use and dynamic pricing are related concepts in energy economics but have a key distinction. Time of use pricing involves pre-set, fixed price periods (e.g., peak, off-peak) that are known in advance and typically remain constant for months or seasons. Consumers can plan their energy conservation around these predictable rate changes.

In contrast, dynamic pricing refers to rates that change much more frequently, often hourly or even in real-time, based on current supply and demand conditions on the grid. This might include "critical peak pricing," where prices surge significantly for a few hours on very high-demand days, or "real-time pricing," where rates fluctuate continuously. While time of use provides consistent economic incentives based on general patterns, dynamic pricing offers more granular, immediate price signals, requiring greater responsiveness from consumers, often facilitated by smart appliances or automated systems. The main point of confusion arises because time of use is a type of time-varying pricing, but it lacks the real-time variability inherent in broader dynamic pricing models.

FAQs

What is the main purpose of Time of use rates?

The main purpose of time of use rates is to encourage consumers to use less electricity during periods of high demand (peak demand) when power is more expensive to generate. By shifting usage to off-peak hours, consumers can save money, and utilities can better manage the grid.

How can I save money on a Time of use plan?

To save money on a time of use plan, you should try to shift your electricity usage to off-peak periods when rates are lowest. This means running energy-intensive appliances like dishwashers, washing machines, or electric vehicle chargers during the night or on weekends. Many utility companies provide tools to help you understand your specific peak and off-peak times.

Are Time of use plans mandatory?

The mandatory nature of time of use plans varies by region and utility. In some areas, they are the default or even mandatory for residential customers, while in others, they are optional or only apply to large commercial/industrial users. Check with your local electric provider to understand the options available to you and how your electricity bill is structured.

Does Time of use pricing affect solar panel owners?

Yes, time of use pricing can significantly affect solar panel owners. Solar panels typically generate the most electricity during midday, which might be a mid-peak or off-peak period for the utility. Owners can benefit by using their self-generated power during peak utility hours or by selling excess power back to the grid at higher rates if their net metering agreement allows. It influences the return on investment for solar installations.

What is the difference between Time of use and flat rates?

The difference between time of use and flat rates lies in how electricity is priced. A flat rate charges the same price per kilowatt-hour (kWh) regardless of when you use it. Time of use rates, however, vary the price per kWh based on the time of day, week, and season, with higher prices during peak demand times and lower prices during off-peak hours.