Why Time of Use Rates Make Sense

TOU and demand charge electricity rates are structured to help influence customer electricity consumption to maintain and control a utility's peak demand. The concept at its core is to discourage customers from contributing to peak-load times by charging them more money to use power at that time.  In Economics 101, Product Price should reflect Product Cost. This is not nearly as simple as it sounds----especially in a world where we have fixed and variable costs, where these costs are changing, and where it isn’t always clear how these costs attach to individual end users. 

Economics 101 would tell us that “Optimal Pricing” is established when the demand for a good exactly matches supply.  That is in a perfect idealistic world, and that is a world we don’t live in. First, much of the electric utility industry is not “free market” and is regulated under the tenets that utilities are natural monopolies. Electricity pricing and tariffs are “set” and held fixed over a period of time, yet electricity supply costs vary on a minute-by-minute basis.

Most recently, increased renewable generation----especially solar----- has been a major factor in changing the dynamics of TOU pricing.— as rooftop solar penetration increases, it lowers the supply requirement for utilities, thereby depressing the cost (and price).  Conversely, as rooftop solar supply fades towards the end of the day, the supply of electricity required from the utility increases----along with the cost (and price). So, by implementing TOU, and having peak periods correspond to the times of highest electricity cost, a pricing signal is sent to businesses encouraging them to use less during this Peak Period.

Of course, the advent of smart meters has enabled and made TOU rates viable and more precise.  Finally, TOU Pricing is a predecessor for Real Time and Dynamic Pricing----often seen as the Holy Grail of Electricity pricing.