Shopping for a discount makes sense, right? Let’s see what we can save if we try this with electricity.
TOU rates can promote adoption of electric vehicles and strategic electrification. credit: M. Jacobs
The typical utility company offers the same price for electricity no matter what time of day, or even what season. This would make sense if the cost to provide electricity were the same at all times, but that is not how it works. Times of higher overall demand require more equipment, and higher fuel costs.
There’s lots to like about a rate for customers that allows some savings based on the time of the day. This can help in the current debate about changes in the energy supply and what energy supplies should be added. A time-varying, or time-of-use rate (TOU for short) for consumers can improve the picture.
On top of that, a report this week by the American Council for an Energy Efficient Economy finds that TOU rates are a better choice than a fixed charge or a demand charge for continued engagement and support of residential energy savings efforts.
Prices and markets help decisions
Using prices to signal to the consumer and the market is a widely-recognized tool for market forces to guide investment. A utility regulator can better judge a new utility company expense, such as a proposed power plant or gas pipeline, if the costs to meet peak demand are not hidden in a single average price for energy.
When planning for new supplies, the utility companies now have more ways to communicate the costs and consumers have more ways to manage their use. The benefits of TOU rates should be measured in these decisions in terms of both the energy cost savings, and the savings for avoiding capital investment on more capacity.
Past investments help, too
TOU rates can allow energy consumption to be shifted to low-priced electricity. Credit: UCS and SEPA 51st State Initiative
The electric utility industry has made TOU rates possible through a 10-fold increase in the installations of “smart” meters in the United States. These digital meters measure electricity use at least hourly, and are expected to be serving 70 million households. Utilities have shown how these meters can help reduce the length of outages, and can be used to manage the voltage on each line so as to keep the whole system more efficient.
As so often happens with better information, evermore improvements can be found when you can get the data.
TOU rates provide prices on-peak and off-peak, which can promote savings in energy costs and capacity costs. By offering a discount on energy, innovations that use energy on a flexible schedule are more attractive. Utilities can use TOU rates to promote charging up more electric vehicles, or switching away from fossil and inefficient fuels, and making greater use of wind and solar. Knowing there are discounted prices at some times will lead to people and product manufacturers making changes in a few areas, and reaping big gains in return. (See a UCS white paper on this here.)
In fact, TOU rates aren’t just adding a cost allocated to paying capacity needs, but open the door for ideas that allow the time of energy use to be shifted. When these TOU rates are the normal practice, utility needs for new energy supplies will be lower. This makes sense for policymakers looking at rate designs, because reducing the hours of highest demand can lower everyone’s rates.
But just as important, the reduced demand for energy can be part of the integrated planning for all types of resources. Making the smart meter and the timing of energy uses part of the energy supply tool box can help solve society’s energy needs.
A technical note
Regulators considering the value of TOU rates should measure the benefit from shifting loads every day from higher-priced energy to lower-priced energy. Typical demand response practices are applied to very few hours, so there are minimal amounts of energy to be considered. TOU rates are in place on all days, and thus will lower energy consumption when electricity is produced by less-efficient generation.