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How Effective are Time-of-Use Rates? Hint: Not Very

image credit: ID 162670447 © Katie Nesling | Dreamstime.com

Time-of-use rates are fast becoming a popular tool for utilities to deal with an uncertain future in electric markets. Faced with declining demand and an irrevocable shift towards renewable energy, more utilities across the country are hopping onto the TOU bandwagon or exploring their use to better their revenue prospects and grid functioning. 

California utilities began offering opt-out and opt-in rates to customers last year. This October onwards, all new customers in the state will default to TOU rates. Virginia also recently gave the go-ahead to Dominion Energy to introduce TOU rates in its territories. 

It is easy to see the attraction of flexible rates. Dynamic pricing will boost the bottom line at investor-owned utilities even as it reduces their generation costs by shifting peak loads away from expensive non-renewable energy sources. For utility customers, TOU rates promise reduced electric bills by shifting energy consumption to off-peak hours. 

But their neat storyline, in its current form, has several loose ends. Available research points to a mixed record of success for TOU rates in pilots at utilities. Studies conducted over the years have found that the grid’s compositional reality makes it difficult to deliver on the promises of renewable energy integration and reduced rates. TOU critics also claim that such rates allow utilities to charge for the same infrastructure twice. Finally, TOU rates might also end up having an adverse effect on climate change and society. 

 An Undesirable Load Shift? 

One of the perceived benefits of TOU rates is load shifting. By moving grid loads away from peak demand, utilities can better manage and distribute their power requirements. Load shifting also has the potential to reduce overall power consumption and provide a pathway to boost renewable energy use in the grid. 

But load shifts can also create more time periods that resemble peak demand. A recent study conducted at the University of Texas in Austin found that dynamic pricing creates additional residential peaks. “They (dynamic pricing programs) can actually increase the magnitude of the residential peak load by incentivizing customers to concentrate appliance usage within the low-price hours,” the study states. Arkasama Bandopadhyay, one the study’s authors, told me via email that the second residential peak could actually be higher than the original peak, even though it occurs at a different time. 

In states like Texas, where airconditioning use skyrockets during the summer, residential peaks can account for as much as fifty percent of overall demand, Bandopadhyay pointed out. The same study also found that ramp rates for time-use rates are also higher as compared to constant rate cases, meaning utilities will need to deploy energy sources that can be dispatched quickly.  

One could argue that this state of affairs sets up the perfect use case for renewable energy. Indeed, residential off-peak times at Southern California Edison (SCE) are designed to promote energy consumption in the morning and afternoon, when the sun is shining. Texas has an arsenal of wind power that can be deployed into action at night, during off-peak hours. 

What to make of Dominion Energy’s off-peak hours, though? They will occur after 10 pm during summer months. This means there will be a surge in demand after that time. The utility’s energy mix in Virginia is heavily skewed towards natural gas and is expected to increase in the future after a spate of investments in recent years. It is reportedly setting up an offshore wind “empire” but that future is some ways off, considering that it has set itself a target of achieving only 15% renewables in its grid by 2025. Virginia has also not provided a specific timeline for removing fossil fuel generation from its energy mix. Meanwhile, the TOU hours ensure that fossil fuel use is not only perpetuated but also encouraged. 

The Promise of Load and Bill Reductions

Time-of-Use rates are marketed as tools to reduce overall energy consumption in households. Concentrating energy use in off-peak hours can reduce bills and grid loads. 

But academic research relating to this topic paints an uneven picture. In this picture, electric consumption may increase or decrease due to TOU rates and bill reductions are neither widespread nor uniform. 

Some studies have indicated peak load reductions of as much as 50% and a corresponding 10% decrease in overall energy consumptions for grid systems that utilize TOU rates. But the UT Austin study found that overall household energy consumption remained the same even as load shifted away from peak hours. “Our analysis challenges the frequently expressed notion that dynamic prices would be “cure-all” solutions to high peak demand issues in the electricity sector,” the study concludes. 

Lower electric bills are also doubtful. If the UT Austin study is correct, then utility customers should be able to reduce their electric bills by altering their energy habits to off-peak hours. A 2017 CPUC testimony by attorney Marcel Hawiger from The Utility Reform Network (TURN) contradicts this theory. It contains the results of a pilot TOU rate case study conducted in 2012 for customers of SCE and PG&E. There was no bill change for 40% to 50% of SCE customers and 50% of PG&E customers. In fact, as many as 40% of customers witnessed bill increases. From the overall sample, only 10% to 15% had reduced bills. 

A decrease in bill amounts is also contingent on the utility’s rate design and willingness to pass on benefits to customers. When Arizona Public Service, a pioneer in TOU rates, presented its General Rate Case (GRC) in 2016, it included a mandatory demand charge and higher basic service charge for certain residential customers. This is just one example of how the contents of an electric bill might change. 

It must be noted that Virginia’s Dominion does not have a particularly flattering past record in this instance. The utility has made free use of rate adjustment clauses (RACs) to tack additional line items onto consumer bills in the past. The current introduction of TOU rates is also accompanied with the costly exercise of deployment and installation of smart meters in Dominion’s service area and marketing and education budgets regarding TOU. The buildup of costs, especially the latter, makes it uncertain whether Dominion’s customers will witness a reduction in their overall bills.

The TOU Effect on Low-Income Customers

All of the points mentioned above stress the need for an optimal rate design that provides customers with an incentive to shift peak loads and results in cost and load reductions. But electric customers are a heterogeneous mix with multiple income levels. For customers with high or varying loads, a time-of-use rate might provide sufficient reductions. But the time-of-use rate roulette penalizes low-income customers. A 2017 study by the American Council for an Energy-Efficient Economy found that low-income customers were disproportionately affected by rate designs based on demand charges. This was primarily because they tend to use lower amounts of electricity and a flatter load profile with less discretionary energy usage, limiting their ability to respond to changes in electric charges. Unless a proper price signal is sent to customers through rate design, TOU can also be counterproductive to energy efficiency because low rates could reduce customer motivation to participate in utility energy efficiency programs, the study noted.  

Rakesh  Sharma's picture

Thank Rakesh for the Post!

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Discussions

Tom Langdon-Davies's picture
Tom Langdon-Davies on May 28, 2020 11:42 am GMT

In UK there is a definition of fuel poverty, where a consumer spends more than ten per cent of their income on heating fuel and electricity.

There is a debate as to whether such low-income consumers should be accommodated within supplier tariff policy , or by other social support mechanisms.

Is it the supplier's responsibility to make special arrangements for low-income consumers? If they do, will it distort policies designed to encourage domestic demand response?

Matt Chester's picture
Matt Chester on May 28, 2020 11:59 am GMT

It makes sense to have an actual measure and/or line in the sand. Is there a specific reason 10% was chosen in the UK?

Tom Langdon-Davies's picture
Tom Langdon-Davies on Jun 3, 2020 4:08 pm GMT

In reply to your question about how the figure of ten per cent of income was arrived at as a threshold for fuel poverty, the answer seems somewhat arbitrary. In 1988 it was calculated by the UK Department of Energy that the median level of expenditure on energy was five percent of household income, and half that was deemed to be a good measure of fuel poverty. A useful guide to the fuel poverty question is in a report by the London School of Economics in 2011, see http://sticerd.lse.ac.uk/dps/case/cr/CASEreport69.pdf

I hope this is useful.

Rakesh  Sharma's picture
Rakesh Sharma on Jun 1, 2020 5:24 am GMT

Hi Tom, 

The Low Income Home Energy Assistance Program (LIHEAP) program is designed to help low-income households with their energy bills. 

https://www.benefits.gov/benefit/623

https://liheapch.acf.hhs.gov/tables/benefits.htm

Your question about LIHEAP distorting demand response programs is an interesting one. According to this piece, some environmentalists have advocated for budget billing for low-income consumers, meaning they'd have to pay a set amount each month based on their usage in the last year. This would discourage them from splurging on electricity during periods of high demand because they'd have to suffer consequences the next year. 

Eric Van Orden's picture
Eric Van Orden on Jun 1, 2020 8:01 pm GMT

The rate design and components are important to consider. But, I disagree with the blanket statement that Time of Use rates financially penalize low-income consumers. I believe some of that comes from the assumption that low-income consumers use less energy in total. But, that's not always the case.  In many cases, low-income users have less efficient homes, more electrical appliances for heating because electric baseboards tend to be cheaper to install, and sometimes more people living in the home. These are generalizations. But, Xcel Energy Colorado's pilot showed that total kWh energy consumer by low-income customers was lower in the summer and higher in the winter (Wishart Testimony page 27). To a certain extent, this reinforces the case to create time of use and other dynamic rates with hourly and seasonal variations. 

Rakesh  Sharma's picture
Rakesh Sharma on Jun 2, 2020 6:08 pm GMT

Eric, agreed. The blanket statement does not hold true. But I do think other dynamic pricing options, such as charges based on previous usage, should also be explored. They are equally, if not more, effective in helping low-income consumers and as energy efficiency tools. 

Dr. Amal Khashab's picture
Dr. Amal Khashab on May 30, 2020 1:56 pm GMT

Hi , Rakesh

I believe that TOU has merits for residentials even with Roof Top PV. Low tariff during day time hours about noon will encourage storage excess energy to use during the high tariff period. Storage may be thermal ( icing) or chemical ( batteries).

Rakesh  Sharma's picture
Rakesh Sharma on Jun 1, 2020 5:08 am GMT

Amal, 

Use of storage batteries, that require an additional investment by residence owners, to generate renewable energy further proves my point that it will take some time before TOU becomes an effective mechanism to save on costs and energy.   

Jim Stack's picture
Jim Stack on Jun 1, 2020 5:33 pm GMT

If Utilties combine TOD rates and special low Electric Vehicle Charging it can help even more. Many Electric vehicles can set a timer to charge anytime at night or day that it helps the GRID. If you give a good low rate it can work out very good to shift loads. Electric vehicles are also a big growth area for utilties. Sales are growing faster than any other vehicles. New trucks from EV Semi to pickups are all coming in 2022. Get ready now.

   There are also V2G options coming very soon. That can help shift load even more. In FACT Utiltiy fleets should be changing to Electric. It's good for EVeryone. 

Carl Popolo's picture
Carl Popolo on Jun 3, 2020 3:46 pm GMT

Very interesting.  I'm supposing that in maybe 10 or 20 years the proliferation of smart loads, better storage technology and transparency on TOU pricing might actually flatten the entire demand curve if price incentives truly drive usage.  I can imagine new spikes at 3am because my mercenary battery wall sees that it's worth a penny more per hour to charge up at that time.  If the supply side reacts rationally, then this should reduce price friction across all hours of the day and the notion of a peak hour becomes pretty arbitrary.  The most ironic outcome might be higher overnight prices when the PV supply isn't available.

Kenneth Gibson's picture
Kenneth Gibson on Jun 5, 2020 1:34 am GMT

We installed roof top solar on our home because TOU rates made it a good financial decision as well as a good environmental one. We live in the SF Bay Area. My assumption was that TOU pricing would be imposed on commercial customers of utilities but not necessarily on households. The win-win effect would be that highrise office buildings would reduce the air conditioning level and people would not have to wear jackets and sweaters in their offices in summer. (In winter I'd often be broiled at work because the heat was set too high. TOU should be used to reward renewable installation and punish energy waste. Low income families are not likely to overuse the air-conditioning if they single family metering.

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