Evaluating Time of Use Pricing

Time of use pricing (TOU) is being proposed to allow people to align their usage of electricity to when it is least costly to produce. This is sometimes referred to as time of day pricing.

Electricity is most costly to produce during periods of peak demand, primarily in the early or late afternoon, depending on geographic location and time of year.

This is largely due to less efficient peaking plants that are brought on line to meet peaks in demand.

Efficient, base load power plants, usually coal, natural gas or nuclear, tend to operate continuously within narrow load bands.

A number of experiments are underway for determining whether TOU actually reduces energy usage and, most importantly, for those pushing TOU, reduces CO2 emissions.

From SRP Power District Web Site Other utilities have different TOU pricing schedules.
From SRP Power District Web Site
Other utilities have different TOU pricing schedules.

Small experiments have been done with consumers who volunteer and are eager to participate in reducing CO2 emissions. The response has usually been positive because the participants went out of their way to modify their behavior to conform with the pricing structure. In essence, they tried to use electricity when it was cheapest during off peak hours, and avoid using electricity during peak hours.

Pilot programs are proposed for California next year. Residential customers of the major investor-owned utilities (Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric) would use the same TOU pricing plan used by commercial and industrial customers.

One organization, the Environmental Defense Fund (EDF), has proposed four criteria for determining the success of TOU:

  • Greenhouse gas reductions
  • Renewable energy optimization
  • Electric vehicle (EV) optimization
  • Avoided infrastructure costs

No mention is made of reducing costs for consumers, or of making it easy for consumers to adapt to TOU pricing.

This last point is critical to the success of TOU pricing, because TOU pricing requires consumers to change their habits and life style.

Here is a look at each of the EDF criteria:

Greenhouse gasses

Reducing greenhouse gasses requires the use of less electricity generated by fossil fuels.

This can be accomplished by a massive switch to renewables or by having families use less electricity.

Very few residential uses of electricity are affected by TOU pricing.

The major residential uses of electricity are shown in the accompanying table.

Residential Electricity Usage
Air-conditioning 13%
Lighting 11%
Water heating 9%
Space heating 9%
Refrigeration 7%
Television 7%
Clothes dryers 4%
Furnaces 3%
Computers 2%
Cooking 2%
Dishwashers 2%
Freezers 2%
Clothes washers 1%
Other uses 27%
Source: EIA

Very few of these uses can be shifted form one time of day to another.

Air-conditioning is needed when it’s hot. Lighting is needed when the sun goes down.

The only way to reduce the usage of air-conditioning or lighting is with a change in life style or adopting new technologies, such as LEDs.

It might be possible to shift dishwashing and clothes washing and drying to off peak hours, but these would have a minuscule effect on the usage of electricity.

It’s obvious that TOU pricing will have very little effect on the amount of electricity that’s used and therefore, on greenhouse gas emissions.

Renewables

Renewables in California, as elsewhere in the U.S., are a very small part of electricity supply, and cost more than electricity produced by fossil fuels, so it’s difficult to imagine how TOU pricing will affect renewables or greenhouse gas emissions.

PV rooftop solar is more likely to shave peak loads, but is not part of electricity supplied by utilities, unless net-metering is included, so TOU is essentially irrelevant. TOU could actually have a negative affect on the cost of electricity with net-metering pegged to retail rates for electricity, as it would encourage homeowners with PV rooftop systems to sell electricity to the utilities at the highest TOU price.

If residential electricity usage is largely unaffected by when electricity is used during the day, adding more renewables to the supply of electricity won’t affect TOU pricing.

Or, stated differently, TOU pricing has no effect on the usage of renewables.

Electric Vehicle Optimization

TOU pricing could affect when EV batteries are charged.

If EV and PHEV batteries are charged during the day, it would increase the load and probably increase peaks in demand. This would increase the need for more investment in peaking power plants.

A high price for electricity would likely motivate people to recharge batteries at night, when TOU prices are lowest.

Today, and for the foreseeable future, EVs and PHEVs are a minuscule part of demand, so TOU pricing will have a very small effect on residential usage of electricity.

Public policies to add charging stations in office buildings and in downtown areas to promote the usage of EVs and PHEVs, has the perverse affect of increasing demand during the day, which can increase peak demand.

Avoiding Infrastructure Costs

The EDF and other extreme environmental groups are constantly promoting the idea that reducing peak demand will reduce the need for building new power plants, especially peaking pants that are less efficient than base load power plants.

While this might be true in the short term, it probably isn’t true over the long term when growth in overall demand increases. Currently, the EIA forecasts an average growth of 1% in demand over the next few decades. At some point, increased power generation is required to meet the increased demand, so the investment in power generation is deferred and not avoided.

Since very little residential load will be affected by TOU pricing, it’s doubtful that TOU pricing will result in cutting the peaks in demand, which typically occur during the afternoon or early evening.

There are other methods, known as demand response, that can cut peak electricity usage.

An example would be cutting off the flow of electricity to water heaters for short periods of time. If done for short periods, say 15 minutes, it will have little effect on the temperature of the hot water. While this would reduce demand for short periods of time, which with other demand response programs could cut the peak load, it will not reduce the usage of electricity because more electricity will be needed to restore the temperature of the hot water to normal.

Summary

What’s likely to happen, as it has in earlier TOU experiments, is that some people, those who want to cut their carbon footprint, will cut back on their use of electricity, such as by reducing the amount of air-conditioning they use.

The basic premiss of TOU pricing is that it will shift residential demand for electricity from peak to off-peak hours of the day. As can be seen, there are very few opportunities for homeowners to shift demand to off-peak hours, and little can be accomplished by forcing TOU pricing down the throats of consumers.

It’s obvious there will be few, if any, benefits from TOU pricing, while TOU will increase overall costs in several ways.

First, it requires utilities to invest in more equipment and software. The most obvious is the need to install smart meters suitable for using TOU pricing.

Second, it requires utilities to maintain a complex pricing structure that increases overhead costs for programing and issuing detailed invoices customers can understand.

Thirdly, it requires timely and expensive education of customers, who are probably not familiar with how they might be able to reduce their electric bills with TOU pricing. It’s also likely to create more confusion and negatively affect utility-customer relations.

TOU is merely another scam being perpetrated on Americans by extreme environmentalists, under the pretense of cutting CO2 emissions.

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0 thoughts on “Evaluating Time of Use Pricing

  1. Great Article Donn,
    Demand Response is already a component of many rural utilities who employ Off Peak Meters offered to rural customers for hot water & air conditioning reducing their overall electric bill. I am sure this practice could be expanded by making Off Peak mandatory where applicable. (if we want to be making things mandatory.)
    Depending on how much this is already being employed will determine how much more could be saved.
    On the down side I do notice when my air conditioner has been off due to off peak shutdown my air conditioner works very hard for an extended period of time to achieve the desired temperature. I have to wonder how much energy was used to get there? Was anything saved?.
    ( Off Peak for my air is off for hours not 15 minute blocks like you mention for water heaters)

    • Thanks for your comment.
      I was surprised when you said your air-conditioning was off for a long period of time. It’s supposedly only to be off for around 15 – 30 minutes, otherwise the temperature in the home increases and the amount of electricity needed to restore the correct temperature also increases. Is there anyway you can tell how long the air-conditioning is off?
      Is this something you can choose, or is it set by the utility?

  2. Hey Donn, thanks for another excellent post.

    I went on voluntary T.O.U. with Georgia Power this past summer and I’m still analyzing my bills. Basically, peak was 4-7 p.m. on weekdays (when I was at work, so I turned all by my fridge and freezer off) from June 1 thru Sept. 30. I’m feeling like I saved about $50. My home is so efficient that when I shut my AC off at 7:00 a.m. it’s 72 degrees and when I turned it back on at 7, it was 78 degrees, even on a 95 degree day (got up to 79 – 80 on 95-102 degree days). Took about 60 min. to get it back down to 72.

    I’ve plugges this column into my web page here:

    https://sites.google.com/site/freemarketsolarpower/home/pirate-solar-power-systems/solar-tree

    Thanks again!

    • Thanks. I hadn’t seen a super off-peak rate before, but the time period fits with what some others call off-peak hours. I’m impressed with the efficiency of your home, which I assume is due to extra insulation and closing of air leaks. Have you ever had a thermal imaging done of the house?

      • First, some typos in my last post: “so I turned all by my fridge and freezer off” should be “so I turned all BUT my fridge and freezer off.” Ditto for “I’ve plugges this column into my web page here:” (Plugged). Sorry!

        Second, I have not done a thermal imaging of my home because when it was built GA Power analyzed it and certified it a “Good Cents” home (a program they’ve since stupidly abandoned). My power bills (I bought the home a year after it was built) have reflected that advertised efficiency.

        About 5 years ago I had a free energy audit by GA Power and the guy said I had the lowest power bill in the `hood and I’d done all there was to do efficiency-wise. By then I’d put on a new roof and added $750 worth of extra roof vents (South Georgia heat is the enemy here).

        So I guess I never really thought about bearing the expense of thermal imaging to confirm what I already believe — that my home’s already at optimal insulation and efficiency.

        It helps that I don’t cool my home’s second floor unless I’m up there. It builds heat and THAT acts as a thermal-insulating layer for the first floor, which is where I spend 98% of my time.

        Finally, I’m not home a lot so my numbers admittedly are beneficially skewed. A family of four obviously would have a higher bill, but I’m convinced that it would still be lower than they’d incur inside other homes in my subdivision.

    • Thanks for the added information. I was wondering about the refrigerator and freezer. I agree there is little reason to do a thermal imaging of the home, but I thought, because of your interest in the subject, you might have done one.

  3. Pingback: Weekly Climate and Energy News Roundup #202 | Watts Up With That?

  4. Donn, I saw this in an online debate and I’m not sure I understand it but it’s in response to T.O.U. schemes. Does it make sense to you?

    TOU is sorta like the carpool lane. Good but not perfect. 

    What we need is a billing system (aka… a tariff) that accurately bills you for your use of the system. I’ve been thinking about what this would look like for a couple of years now… Recently I came across a fellow that has come up with just such a tariff.

    The basic system is sorta like a phone plan but not exactly. First step is you purchase a subscription to the power system. There would be many kinds of subscriptions (you could self-customize actually) but aim for the customer who would choose one that fit their needs. Just imagine what your 24 hour demand profile looks like… That’s what your subscription should look like.

    Example 1. Let’s say for hour X you have a subscription for 5 kW of demand. Let’s also say that the real time price of electricity for hour X is high relative to what you are charged in your subscription. In this case you can reduce your usage to 3 kW and sell 2 kW back into the system for the spot price. 

    Example 2. Let’s say your projected demand in hour X is more than your subscription… In this case your consumption above your subscription will be charged at the spot market rate. 

    Example 3: Let’s say you’re on vacation and your consumption is way below your subscription. In this case you’ll be selling all your excess rights back into the system for the spot rate. The spot rate could be zero… it could be break even.. or it could be gravy.

    This is the basic idea of how to set up billing in such a way that it fairly treats everyone in the system by properly rewarding/charging people for their use of the system.

    If you don’t get it the first time around don’t worry… I didn’t either. This sort of thing needs pictures. 

    • I understand the concept, but I wonder whether the added expense and confusion is worth the effort. Maybe, but if there aren’t many possibilities for shifting load in a residential situation, why bother? I might add that, as I interpret the plan, it doesn’t charge for use of the grid if the owner has PV roof top solar. Especially if the owner can sell electricity at high net metering rates.
      My response? Why waste time and effort when the vast majority of people are being charged, what is in essence a flat rate, when there are very few opportunities to shift the load?

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