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What Are Time of Use Rates? Your TOU Guide

Samuel AdeyemoSamuel Adeyemo

What do the prices of movie tickets to Hollywood’s latest blockbuster and the cost of electricity in California have in common? First, in most theaters, you will find that ticket prices change based on the time of day you want to see your show. This is similar to electricity rates in California (and other areas), where the cost of energy varies based on the time of day it is consumed (an approach known as time of use rates — or TOU rates).

Second, even for a specific time (take a matinee for example), movie tickets often cost less for different types of consumers. Students and seniors pay less for their tickets than others do. We see a similar phenomenon in California where for a given time period, consumers who use less than a baseline amount of energy, will pay less than those who use more than the baseline amount of energy, even if it is for the exact same time of day. The illustration below shows how California’s Pacific Gas and Electric (PG&E) utility varies the cost of energy based on time of day and cumulative consumption.

In this article, we focus on the first of these energy rate factors, where the cost of energy varies according to the time of day it is consumed. In other articles, we look at how rates vary based on level of energy consumption, how utility rate changes affect the returns for solar customers, and how you can optimize your designs to maximize savings under different rate types.

An example of a time of use rate (TOU rate) with electricity peak hours and off-peak hours that have different prices
Figure 1: A diagram of a PG&E time of use rate (E-TOU option A) during the summertime. Source: www.pge.com.

What Are Time of Use Rates (TOU Rates)?

Time of use rates are a type of electricity rate used by some utilities for billing customers. Under a TOU rate, customers pay different prices per kilowatt hour (kWh) of electricity that they use, depending on when they use it. Pricing varies by time of day, and can also vary based on the day of the week (weekend or weekday) and the time of year. 

TOU rates are characterized by different prices between “peak hours” and “off-peak” hours; some rates also have other intermediate price periods as well. 

TOU rates can apply to both residential and commercial customers. The exact details of a customer’s TOU rate will depend on the specific rate plan offered by their electric utility. 

What Are Peak Hours?

Electricity costs more during certain designated “peak hours” for customers on a time of use rate plan. These hours are typically selected to coincide with the times when the demand for electricity is greatest (often in the afternoon/evenings and the summertime). For example, California utility San Diego Gas & Electric (SDG&E) has peak hours from 4 - 9 pm.

One reason for peak pricing is because utilities must have additional energy generation resources available to meet the needs of the grid during limited times when energy demand is highest. By pricing electricity higher during times that typically have the highest demand, TOU rates are intended to provide price signals that encourage customers to shift their energy usage to other periods. 

What Are Off-Peak Hours? 

Off-peak hours are the hours under a time of use rate plan when electricity is less expensive. For customers that can shift some of their energy-using activities—like running the washing machine or charging an electric vehicle—to these off-peak hours, the savings can be significant. We’ll look at an example of this in the case study below.

How Common Are TOU Rates? Where Are They Used?

California is among the first states to make this type of utility rate structure mandatory for customers. In 2019 and 2020 most residential customers will be transitioned to TOU plans. All commercial, industrial, agricultural customers are already required to be on one. 

California is not alone, however. In 2014, the Massachusetts Department of Public Utilities adopted default time of use rates for residential customers which went into effect in 2015. The Tennessee Valley Authority, the nation’s largest federally-owned electric utility which serves nine million customers in Tennessee and other southern states, has also explored transitioning to TOU rates.

Time-variable rate programs are already offered on a voluntary basis in nearly every state. In early 2019, Ahmad Faruqui, Principal at the Brattle Group, told Utility Dive that “About half of U.S. investor-owned utilities have optional time varying rates for residential customers," and that new programs are being tested or talked about in at least ten states. 

Although participation in voluntary TOU programs has been low to date, as many states consider efforts to modernize the electrical grid and reduce peak energy consumption, TOU rates (and other related time-based rate structures) may become increasingly prevalent. There are multiple approaches that utilities take when it comes to time-varying energy costs, but TOU rates are one of the most common.

Understanding TOU Rates in Practice: A Case Study

Let’s take a look at a case study of two households to get a more complete picture of the impact of a time of use rate plan. Using the modeling tools in Aurora’s solar design and sales software, we can better understand how TOU rates affect customers’ bills.  

That’s because, with the input of the customer’s bill amount or kWh energy usage, Aurora’s Consumption Profile tool can model the customer’s energy consumption patterns throughout the day and year (their “load profile”) based on the characteristics of the home and weather data (pulled automatically from local weather stations). 

Note: Aurora’s consumption profile is just one of many tools we offer
to help solar contractors get a complete picture of their customers’
energy usage and design the optimal PV system with ease. 

Sign up for a demo to learn more about these features and see them in action.

In this example, we’ll take a look at a time of use rate from PG&E: E-TOU A, a residential plan.1  In Figure 1, you can see that the cost of energy is higher between 3pm - 8pm on weekdays than during any other time. During a weekday in summertime, as of March 1, 2017, rates range from $.317/kWh, to $.393/kWh. That is almost a 25% variation between the lowest and highest cost energy!

Household A lives in Bakersfield, CA. We used Aurora to model the customer’s load profile based on typical hourly summertime energy consumption for a house in Bakersfield. According to U.S. Climate Data, Bakersfield temperatures range between 64 and 97 degrees in the summertime. Consequently, Aurora by default generated a load profile where air conditioning was a large portion of Household A’s energy consumption (see Figure 2). Unfortunately for this household, about 43% of their summertime energy consumption occurs during the time when electricity is most expensive (peak hours).

Customers’ load profiles (consumption during electricity peak hours vs. off-peak hours) affects their bill amount under a time of use rate
Figure 2: A load profile for a house (“Household A”) in Bakersfield, CA generated automatically in Aurora.

Now let’s consider Household B, also located in Bakersfield, CA. In this case, instead of using Aurora to automatically generate a typical load profile, we obtained actual measured interval data (Green Button data) for a house in Bakersfield from PG&E. We uploaded this into Aurora, which generated the load profile below.

This homeowner has an electric vehicle (a Tesla) which they drive about 20 miles per day and charge at night (off-peak hours). Because of their usage patterns,  only about 10% of their energy consumption occurs during the 3pm - 8pm peak hours.

This customer uses most of their electricity during off-peak hours leading to a lower TOU rate bill Figure 3: Load profile for a house (“Household B”) in Bakersfield, CA generated in Aurora, based on uploaded interval (Green Button) data.

If you’ve been following along, your intuition would suggest that for the same energy consumption, Household A should have a higher electricity bill than Household B, because they are consuming more energy during peak hours. Before we evaluate the financial implications of time of use rates, here’s a quick recap the two households’ information:

  Household A Household B
Location Bakersfield, CA Bakersfield, CA
Utility Rate PG&E, E-TOU A - Residential TOU Region W PG&E, E-TOU A - Residential TOU Region W
Energy Consumption (July) 1,873 kWh 1,873 kWh
% of weekday consumption during peak hours (3pm-8pm) 43% 10%

Running Aurora’s utility bill calculator, we find that Household A (high peak consumption) had a bill of $591 for the month of July. We find that Household B (low peak consumption) had a July bill of $561. So despite consuming the exact same amount of electricity, Household A’s bill was about 5.5% higher in July than Household B.

pre- and post-solar bills for Household A on TOU rate
Figure 4: Household A’s July electric bill is $591.

pre- and post-solar bills for Household B on TOU rate
Figure 5: Household B’s July electric bill is $561.

Does this make sense? Mathematically, we can get a rough estimate of how much of a difference TOU rates should make in electricity bills with a simple formula:

TOU Bill Difference = (DaysTOU/7) * (ConsumptionpeakA- ConsumptionpeakB) * (URpeak - URoffpeak) / URoffpeak

Equation 1: Rough estimate of the TOU effect on energy bills.

Let's plug some numbers into Equation 1.

Term Definition Value
Days TOU Days of the week that TOU values apply 5*
Consumption_peakA Energy consumption (kWh) during peak hours for household A 43%
Consumption_peakB Energy consumption (kWh) during peak hours for household B 10%
UtilityRate_peak Peak period utility rate ** $.393/kWh
UtilityRate_offpeak Off peak period utility rate** $.317/kWh

*TOU rates in this region only apply to weekdays
** For simplicity we are assuming that this is for the above baseline energy consumption

TOU Bill Difference = (5/7) * (43%-10%) * (.393- .317) / .317= 5.64%

You can see our quick estimate came pretty close to the actual difference between Household A’s (high peak consumption) and Household B’s (low peak consumption) energy bills. (In this related article, we extend this case study to consider how increasing the total amount of energy consumed affects energy bills.)

Key Takeaways:

  • Like the prices of movie tickets, under time of use rates, the cost of electricity varies based on the time when you use it.
  • California tends to be a bellwether for the U.S. solar energy market; TOU  rates are already available on a voluntary basis in almost all states and utilities are increasingly considering their expansion as a means to reduce peak energy demands, so it is a good idea to understand how they work.
  • For solar customers in TOU areas, understanding these rates is particularly important because TOU rates affect solar savings. Modeling software can help contractors provide accurate savings estimates for customers.
  • You can use the following simple formula to calculate how much of an impact the difference between high-cost electricity and low-cost electricity has on a homeowner’s bill:
  • TOU Bill Difference = (DaysTOU/7) * (ConsumptionpeakA- ConsumptionpeakB) * (URpeak - URoffpeak)/URoffpeak*

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Editor's Note: This article was originally published on March 21, 2017. It was updated in October 2019 for freshness, accuracy, and comprehensiveness.

1 Note that this case study uses the version of the PG&E E-TOU A rate plan that was in effect as of March 1, 2017. While energy charges under this rate have changed, the peak and off-peak time periods remain the same at the time this article was updated in October 2019. (The current TOU-A rate plan can be found here). 

Cover photo credit: NREL/DOE.

Sam is the co-founder and COO of Aurora Solar.

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