Time of Use Rates for Energy and How They Can Lower Your Electricity Bill
Wondering how you can lower your utility bill while also choosing a more eco-friendly energy option? Consider if time-of-use rates and shifting when you use electricity are helpful and budget-friendly sustainable habits for your and your family.
Not long after we purchased our electric vehicle, we switched our electricity bill rates from standard billing rates to time-of-use rates. Not only are time-of-use rates better for the environment (in many cases), but they also help us save money on our electricity bills.
We have a garage and installed a 240-volt outlet so we could charge the electric car at home. We knew our electricity usage would increase significantly with the car. Around the same time, we researched adding solar panels to our house. Electric vehicles and solar panels can make a lot of sense together because the higher energy use from the EV makes the most of the solar panel installation.
It turned out that solar panels weren’t the right investment for us at the time. But in the process, I learned that our utility offered time-of-use (TOU) energy rates. TOU rates are not right for everyone. But I think they can help a lot of families save money on their energy bills while also being a more eco-friendly energy option. Here are more details to see if TOU rates are worth considering for your family.
What are standard rates for electricity?
By default, most utilities have fixed or standard rates for customers (especially residential customers). You pay for energy based on a set rate per unit of energy (called a kilowatt hour – or kWh) multiplied by the amount of energy you use. In other words, if your utility charges $0.15 per kWh, you pay $0.15 per unit no matter when you use that energy (morning, afternoon, or middle of the night, for example).
(Price per kWh) x (# of kWh used) = Energy Cost
There are many factors that influence your electricity rates such as:
- where you live
- the types of regulations in your state or community
- and the type of energy required to supply electricity to your home.
What are time-of-use rates for energy pricing?
Increasingly, utility companies (and third-party energy providers) allow you to pay for energy at different rates throughout the day and week based on peak demand for electricity. Generally, TOU rates are lower than standard rates when the demand for energy is lower (like the middle of the night) and higher than standard rates when the demand for energy is relatively high (like mid-afternoon to early evening). Periods of regularly high energy use are called ‘peak periods’ and times of regularly low energy use are called ‘off-peak’ periods.
Under TOU plans, peak energy rates are higher than the fixed rates, but off-peak rates are significantly less expensive. Thus, if you can use most of your electricity during off-peak times, you will save money on your electricity bill relative to fixed-rate pricing (even if you don’t or can’t reduce overall consumption).
Real-life example of changing load demands
The following graphics from PJM, the regional energy network I live in, shows the load forecast (or anticipated and actual energy demand) throughout the day. It pretty consistently ebbs and flows throughout the day with the highest demand on the weekdays around the same times of the day.
December 24, 2022, was the height of the bitter cold snap (sometimes referred to as the bomb cyclone). It began to subside a bit on December 25 and then continued to warm over the next couple of days. When extreme weather events happen (especially very hot or cold weather), energy demands skyrocket as people use air conditioning and heat, respectively, at unusually high rates.
In the charts above, you can see that the total load forecasts for December 24 and December 25 were much higher than January 6 when the extreme cold had subsided. Total demand for energy hovered around 125k megawatts (MW) most of the day on December 25 and 25. On January 6, however, the load forecast peaked at just 100k MW and dropped to about 75k MW in the middle of the night.
During typical energy use cycles, the peaks and valleys of energy use are much more consistent with the pattern on January 6. These peaks and valleys drive the peak and off-peak pricing structure. To the extent incentives like TOU rates can shift energy use into lower demand windows, they can flatten the load demand throughout the day.
How time-of-use rates work for us
To give you a more precise example, here’s how this works for our family. Our utility currently charges $0.09855 per kWh for energy at the standard rate. This rate is fixed for residential customers regardless of the time of day or day of the week.
Under our TOU pricing plan, we pay a much higher rate during peak hours ($0.30288 per kWh). However, we pay a lower rate during off-peak and super-off-peak hours ($0.06830 and $0.04242, respectively). The specific time/day ranges and names for peak and off-peak categories of pricing vary among utilities, but the general idea is consistent.
Who benefits from time-of-use electricity rates?
If your utility allows it, consider whether changing from a fixed-rate plan to a time-of-use plan makes sense for you. It’s most helpful if you have the flexibility to shift the times you use energy into off-peak periods. Being able to do things like run your dishwasher, run your clothes dryer, and take showers outside of the peak rate periods can help you best take advantage of the potential pricing benefits.
Electric vehicle drivers who charge at home also may benefit from a TOU pricing plan. If you have an electric vehicle and you can charge it overnight, you could potentially save a ton of money (relative to fixed rates or peak period rates) charging at super off-peak rates instead of throughout the day. This is what we do.
Having solar panels is another reason to consider TOU pricing plans. The panels fulfill your energy needs during the day. Then you draw energy from the electricity grid at night when the sun is down and the rates are lower.
There is no perfect formula that applies to every household to determine which rate structure is best. But the considerations above are a few of the main factors that might indicate a TOU pricing plan is good for your family.
Other factors to consider for time-of-use rate plans
Here are two variables to keep in mind when considering time-of-use energy plans. A lot about energy pricing depends on the weather, climate, and regulatory environment where you live. So these factors may not apply in your area, but they’re worth mentioning.
Utility or third-party providers
TOU plans are often offered by third parties (in some geographies depending on regulatory considerations) and by the utilities directly. Before changing plans to a third-party energy provider, be sure to do your diligence. Some are more reputable and forthcoming about what you’re actually signing up for than others.
Be cautious about real-time pricing
Time-of-use pricing is not necessarily the same as real-time pricing. Be cautious about real-time pricing plans, particularly if you are on a budget. Energy prices are driven by commodity markets that are incredibly dynamic. Real-time pricing can increase or decrease dramatically very quickly, particularly during extreme weather or as a result of major geopolitical events.
Real-life examples of real-time pricing
For example, just last month during the bomb cyclone, marginal pricing (which closely relates to commodity and real-time prices) jumped tenfold where I live in just a day or two due to intense cold weather. The bitter cold spiked electricity demand to keep places warm.
The charts below from PJM show marginal pricing for Dec 24, 2022, compared to December 25, 2022, and January 6, 2023. Temperatures were frigid on December 24. Marginal prices hit over $500 per megawatt (MWh) at 9:30 am. By 8:30 pm on the same day, as the extreme cold began to ease, pricing dropped to $100-$150 per MWh in my region.
By the next day, temperatures started to creep up and demand subsided a bit more, so marginal pricing started to soften and fell into the $70-$100 per MWh range. By January 6, moderate weather brought energy pricing back to more normal levels for our region, around $40-$70 per MWh.
Even more troubling, Texas experienced an extreme cold event in 2021 that caused real-time energy prices to skyrocket, hitting as high as $9,000 per MWh. Residential customers with real-time pricing plans were charged thousands of dollars for electricity over just a few days.
Real-time pricing can be beneficial, but you’re also subject to unexpected market swings. If that’s not something you can live with, a fixed (standard) rate or semi-fixed rate (like TOU) plan might be better for you.
Time-of-use rates change less often
Our utility has a time-of-use pricing option that sets three prices for peak, off-peak, and super off-peak (as I mentioned above). These prices last for three months. Each quarter, prices reset, eliminating the risk of excessive pricing swings from minute-to-minute or day-to-day based on circumstances like extreme weather or market volatility.
Prices do change each quarter, and we saw a price increase at the beginning of December, but it paled in comparison to the volatility we see in real-time market prices. We can opt in or out of this pricing plan at the end of any billing cycle. Thus, we have the agency to reduce our peak energy consumption and save money without being subject to as much of the risk of very volatile energy market pricing.
How are time-of-use rates more eco-friendly?
Time-of-use energy pricing encourages (and really only makes sense) when you shift your energy usage into off-peak periods, and off-peak energy usage (relative to peak energy usage) may reduce your carbon footprint. Our energy infrastructure and industry are very complicated (far more than I understand), so this is a bit heavy. It can get complicated pretty quickly, but let’s dive in.
Here’s the fundamental premise.
Utilities have certain power plants that run all the time to meet steady electricity demands. These include a variety of generation fuel types from coal and oil to hydro, wind, solar, nuclear, and more. The combination of types of power plants being used at any given time is sometimes called the Generation Fuel Mix.
Different types of plants run in different cadences and have varying cost structure models. Nuclear power plants run continuously. I am not an expert on nuclear plants, so I don’t understand all the engineering behind them. I’ll leave that to the nuclear engineers. But suffice it to say that nuclear plants run 24/7 because it doesn’t make financial sense and isn’t feasible to turn them on and off on demand.
Many renewable energy plants incur most of their costs upfront and have relatively low variable costs to run because there is no cost to the fuel input. Power plants don’t pay for sun or wind or running water once they are operating. So renewable energy power plants tend to be in the fuel mix to meet steady generation demands along with nuclear power plants (where each of these types of plants applies).
Oil, coal, and gas plants, however, can much more easily be turned on and off when demand rises and falls. Additionally, the fuel (like oil, coal, or gas) to run the plants costs money, so these types of plants have higher variable costs (i.e. the costs to run the plant that could be avoided if the plant is not running). These factors make fossil fuel plants much better candidates for being used on demand and only as needed.
Plenty of fossil fuel plants help meet regular, stable demand for energy. But these are also the types of power plants that only get turned on when energy demands spike. The spikes are called “peaks” and the plants that only run during peaks are called “peakers.” (Fancy word, I know.)
If steady demand power plants are meeting the current energy demands, there’s no need to run these types of “extra” plants. But during peak times, these peakers get turned on to supply extra energy to the grid.
Utility companies generally reserve these peaker plants only for peak energy usage because they are more expensive to run (hence the increased price to customers to use the energy during these periods). As you might imagine, utility companies try to run their cheapest plants most often and save the more expensive plants to be used only as needed.
This isn’t a precise rule because energy generation, markets, and delivery are so complex. Certain types of plants, like nuclear plants for example, might be important elements of a reliable generation mix in a particular place, and it doesn’t make sense to turn them on and off all the time even if they are more expensive than one or two peakers. But by and large, cheaper plants run first and more expensive plants only run as needed.
In a lot of cases, the more expensive plants and the plants with more flexibility to turn on and off are also dirtier plants to run (i.e. more fossil fuels). We’ve arrived at a point where dirtier power plants are not only much worse for the environment, but (hands in the air) they’re also more expensive to run than most renewable and clean energy plants. The most economical energy choice is usually clean energy.
In short, when you use off-peak energy, you’re paying lower prices and you’re likely relying on fewer fossil fuel power plants to power the grid during your energy usage times. You can save money and (for the most part) use cleaner energy.
Real-life example of changing generation mix
In those PJM situations I mentioned earlier, you can see in the charts below that the generation fuel mix included a larger portion of oil and coal-powered energy on December 24 and 25 when it was very cold. A few days later (on January 6) when temperatures were warmer and high demand subsided, the generation mix included much less oil and coal.
Gas represents a much larger portion of the fuel mix in January than in December, but that’s because the oil and coal plants were not running. The total load is down over 25%, so as oil and coal plants are taken offline, other energy sources (like gas and nuclear energy in this case) become larger portions of the generation fuel mix even if total generation isn’t increasing.
Other sources of energy change as well. The bomb cyclone was very cold and windy, so it makes sense to see wind represent a larger portion of the generation fuel mix and hydro plants reflect a smaller percentage of the fuel mix. Energy from nuclear power sources is material and appears pretty steady overall (which is one of their most significant benefits).
Energy markets and grids are complex and unique
There are so many different energy plans, systems, utilities, and other factors that impact our energy grid, pricing, and generation fuel mix. Prices and generation mixes are highly dependent on where you live and how you get your electricity. Thus, it’s impossible to have one definitive single conclusion for the broader collective about how to save money on energy that is also more eco-friendly.
But it’s very likely that choosing the time-of-use rates and shifting your usage to off-peak periods will lower our energy bills and use more eco-friendly electricity generation (relative to standard rates during peak periods in your own utility environment) even if you can’t reduce total energy consumption.
I’d love to hear more about how you can reduce your energy bills and opt for more eco-friendly energy sources in your community. Do you have variable pricing structures? Can you shift energy to off-peak periods? Do you know what the generation fuel mix looks like for your energy use and what actions you can take to help make that grid cleaner?
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About The Author
Jen Panaro, founder and editor-in-chief of Honestly Modern, is a self-proclaimed composting nerd and an advocate for sustainable living for modern families. In her spare time, she’s a serial library book borrower, a messy gardener, and a mom of two boys who spends a lot of time in hockey rinks and on baseball fields.
You can find more of her work at Raising Global Kidizens, an online space to help parents and caregivers raise the next generation of responsible global citizens.