Retail electricity providers first introduced the concept of Time-of-Use (TOU) plans in the early 2010s, but awareness of TOU has been steadily increasing as more utilities make these rate plans available. Many utilities even require homeowners to make the switch, especially if they add solar panels. With TOU plans, homeowners can be charged more when electricity demand is higher (since it’s more expensive to produce) and charged less when demand drops.
This article will help you understand what TOU plans are, why utility companies are switching to them, the difference between peak and off-peak hours, how to understand your TOU bill, and how to save money with Time-of-Use and home solar panels.
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What Are Time-of-Use (TOU) Rates?
Time-of-use rates are when the amount you pay for electricity is based on the time of day when you consumed electricity. Also called TOU, this method of determining how you as the customer will be billed for your electricity usage aligns the price of electricity with the cost of electricity production. The utility will charge more during the time of the day when power consumption is higher since they are spending more to meet the increased usage from all of the customers in their service area.
The specific details of a given TOU system vary by utility and region, and they usually involve when the “Peak” and “Off-Peak” hours are for your area. For example, a peak period typically refers to broad blocks of hours like summer weekday afternoon, while the off-peak period includes all other hours.
In other words, TOU energy is more flexible than the traditional system where the electricity company charges a constant rate throughout the day.
Why Do Utility Companies Offer Time-of-Use Rates?
Before TOU rates were introduced, the price of electricity remained constant regardless of when you switched on an appliance or ran the air conditioner. But the demand for electricity on the grid continuously varies. Usage is usually higher during the summer (due to air conditioning) and on weekdays while decreasing in winter and on weekends.
Peak periods are primarily from 4 p.m. to 9 p.m., depending on utility company and location. The “why” makes lots of sense: If a majority of people in a given area are all home at the same time and engaging in activities that require lots of electricity, the electricity grid will experience high demand. In response, the grid operators have to request more power from the generators than they need at low-demand times of the day.
That increased electricity usage usually leads to higher wholesale prices to meet that higher demand. In the worst-case scenario, blackouts may occur if production can't increase enough to meet the higher usage. You then have to account for the time it takes to bring generation online to satisfy the increased demand. While some plants can rev up to full capacity in under an hour, others can take up to half a day, depending upon the method used to create electricity.
Because of those overlapping factors, utility companies can face more costs if they want to create extra generation to meet peak demand, even if they don’t need to reach maximum capacity most of the time. Thus, they’ve realized that it's cheaper to encourage consumers to manage their individual electricity usage. The overall strategy is to lower usage during high-demand times when it's harder to produce quickly and then shift that consumption towards periods with less demand.
Are Time-of-Use Rates Mandatory?
Most time-of-use plans offered by utility companies and retail electric providers are completely optional. You can choose to opt into a TOU plan if you believe it’s the right choice for you based on your energy usage and schedule. Just pay attention to whether or not the plan has a fixed contract term in case you change your mind.
When it comes to customers with solar panel systems on their homes, the utility company can make them sign up for TOU plans. The reasoning lies in the relationship between peak sun hours and peak demand hours:
- Peak Sun Hours - The time of day when solar panels produce the maximum levels of electricity
- Peak Demand Hours - The time of day when people consume the maximum levels of electricity
Solar panels typically generate electricity the most efficiently during the mid-day and afternoon when the sun is directly overhead. Late in the day when overall demand is higher, solar homeowners typically need grid electricity to meet their energy needs, so utilities use TOU plans with solar rates to charge them more during those times. It’s a subtle way for utility companies to increase their revenue from solar homeowners, and make up for the times when solar homeowners aren’t drawing from the grid earlier in the day.
How Can I Tell If I'm On A TOU Rate?
As we discussed above, most people have to opt-in to a TOU plan. It is a voluntary choice you make about your electricity usage.
However, if you aren’t sure about your plan - or you’re a solar energy customer who wants to see what your utility company is doing - it’s time to review your bill. Typically located in the summary area, your bill should indicate your electric rate schedule or class.
Some utility companies even include an insert that provides more information regarding the electric rate class. They should actively inform you about the different rates you will be charged for your usage depending upon the time of day.
How Do Time-of-Use Rates Work?
When developing their rate structures, utility companies usually break days into various periods of power consumption, specifically peak and off-peak hours. It’s their way of managing consumer consumption in hopes of spreading usage throughout the day instead of it all happening at the same time.
Peak Hours vs. Off-Peak Hours
The difference between peak hours and off-peak hours is rather straightforward: Peak rates typically kick in when customer electricity demand is high, while off-peak rates come into play during low-demand hours. But the nuances can fluctuate depending upon your location and seasonality.
For example, utility rates may vary between weekdays, weekends, and the time of year. A winter schedule will differ from one for the summer.
- Summer features increased air conditioner usage to cool down temperatures, leading to heightened electricity use.
- Winter's biting cold can also lead to more demand as electrical heating systems kick into action to warm the home.
The utility may also modify the rate structure to control supply and demand even further. Mid-peak rates may be used during average afternoon consumption, while super-peak comes into play during very high consumption, like summer days with extra-high temperatures.
What Time is the Cheapest Electricity Rate?
In general, the cheapest electricity rate is late at night, or early in the morning. During these off-peak hours, the total demand for energy is lower because fewer people are using electricity, so utilities can sell that electricity at a cheaper rate.
To maximize your savings with a TOU rate plan, the goal is to shift as much of your electricity use as possible to the times when it's the cheapest. To reach that goal, you should try to do things like charge an EV, run your washer and dryer, or do a load of dishes in the dishwasher at night or in the morning, when electricity rates are low.
How Are Time-of-Use Rates Measured?
These variable rates are determined using data gathered from how consumers use electricity. By tracking usage with modern technology like smart meters, utilities can calculate patterns that help them understand customer behavior and make better choices about generation.
Traditionally, the utility companies only had access to old 'dumb' electricity meters that just told them how much power was used in total. With the introduction of smart meters that collect usage information continuously, utilities could learn more about how and when people used power. They can quickly determine electricity demand and match up this consumption with the hours of the day to adjust the rate based on the time of electricity usage. Once they had that data, it was possible to roll out real-time pricing using actual time-of-use information.
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Understanding a Utility Bill with Time-of-Use Rates
With a regular electricity rate, calculating your monthly bill is easy. You just multiply your usage in kilowatt-hours (kWh) by the rate in cents per kWh.
But if you’re on a TOU plan, each time period will have a different rate. Instead of paying attention to your total consumption, you have to look at what you used during each time period. You then multiply each usage figure with the corresponding rate to determine the cost for a given time period. Then, you add up the amount for each time period to get the full bill cost.
How To Save Money with Time Of Use Rates
Whether you choose to sign up for a TOU plan or your utility company puts you on one, there are ways you can save money on your energy bill. The obvious way is to cut down consumption during the peak periods and use energy during off-peak hours:
Switch to Solar Power
This can be your number one way of maximizing savings in the long run to avoid high-demand charges. Solar systems give maximum power during the afternoons and mid-days when the sun is high in the sky. Since TOU rates tend to skyrocket during the evenings, you can store the solar energy you generated and use it later if you have battery storage or net metering.
Charge Storage Batteries
Fill up your batteries using solar or power from the primary grid during off-peak hours, and then use the stored energy when the rates have gone up.
Use Smart Appliances
Some home appliances allow you to control them remotely or delay their operations. If you're usually away in the daytime, you can schedule the dryer or dishwasher to operate during off-peak hours. Some appliances can also track electricity consumption in your area and automatically switch on when the electricity rates are low.
Use a Smart Thermostat
Air conditioning can quickly increase your electrical cost during hot summer seasons. Cold winters also mean high energy consumption to warm your home. Install a smart thermostat and set it up to run less during expensive hours so you don't have to remember to adjust them. When properly programmed, research states you could save up to 10% on your electricity costs by adjusting your temperature settings.
Take Advantage of Net Metering
Check to see if net metering is available in your area. It rewards you when you transmit excess solar power back to the electrical grid if you generated more than you used.
Time of Use Rates and Net Metering
Before TOU plans came into effect for solar power system owners, calculating net metering credits was simple: 1 kWh of electricity put onto the grid was worth 1 kWh you could use later.
With the advent of time-of-use rates, the value of net metering has changed: With many utilities, the credit you get for your surplus electricity depends on when you added it into the grid. As in, if you added 1 kWh to the grid during on-peak hours, it might be worth more than 1 kWh in credit. At the same time, if you added 1 kWh during super off-peak hours, it might be worth less than 1 kWh of credit.
By combining solar and battery storage, you can use time-of-use metering to your advantage. You can use less energy, charge your battery fully, and then channel extra energy into the grid during the peak periods to boost the value of your net metering credits.
Energy Storage Helps Maximize Time of Use Savings
Solar battery storage allows you to avoid the expensive electricity from the grid. Weekday mornings usually find people using more energy to run electronics and appliances as they get ready for work. The same can be said for evenings (around 4 p.m. to 9 p.m.), as people are back home, eating dinner, watching TV, and relaxing. But a large chunk of daytime features low electricity demand in homes as most people are usually at work or out running errands.
Since demand is low and solar production is at its highest during the mid-day hours, you can fill up your battery using solar energy with ease. Meanwhile, you can then use the cheap electricity from the grid during off-peak hours. When the afternoon peak hours kick in, your system will switch over to the stored solar energy automatically.
Electric Vehicles and Time-of-Use Rates
Do you have an Electric Vehicle (EV)? Or are you planning to buy one? Charging an EV battery up to total capacity may require more electricity than you typically use in a single day. For instance, a base model Tesla comes with a 60-kilowatt-hour battery.
The good news is that these vehicles usually come with programmable charging settings, so you can set them to only charge during the off-peak period to save on costs. Switching to a time-of-use plan can provide cost-saving if you own an EV. After getting home from work, plug your EV into the socket and it will wait to start receiving the electricity charge until the off-peak period begins.
As EV ownership continues to increase, the electric grids will need to address the rise in demand during traditionally lower energy usage periods caused by charging EVs. This can be accomplished by focusing on renewable energy sources like solar with battery storage or wind, which can be generated and transmitted at night when typical usage activities are low.
To learn more about electric vehicles and the benefits of charging with solar energy, check out What to Know About Solar Power When Shopping for an Electric Vehicle.
The Relationship Between Solar Power System Design and Time-of-Use Rates
For specific areas with both peak sun and TOU rates, facing panels at a slightly different angle might help you take advantage of your available sunlight. Remember that evening and late afternoon electricity tends to cost more. If your TOU plan has a peak period later in the afternoon, panels facing west will boost the afternoon energy output and help you get more solar energy when electricity demand is high.
However, your overall energy production will go down, as you aren’t maximizing your production during the peak sun hours of the day. Thus, a slightly larger system may be necessary than the one you would have if you didn’t adjust for the TOU rates.
While your solar panel system designs might need to change depending on TOU rates, it's highly recommended that you speak with a solar expert to optimize your solar design. They can look at your consumption pattern on a typical day and the TOU rates in your area to make a recommendation about the best way to install your solar power system. The solar company will then design your solar power system with the optimal panel alignment so you can maximize solar savings.
Just pointing your panels west isn’t always an option though, as shading due to trees or structures can reduce your solar power production later in the day. A professional installer should conduct a thorough technical analysis about this impact and design a suitable system for your home.
Maximize Your Savings with Time-of-Use Rates
Now that you know how TOU plans work, it's time to use them to your advantage to cut down on electricity costs. The Palmetto Free Solar Design and Savings Estimate is the best place to begin. It analyzes your location, energy consumption, weather information, and more to predict how much you can save with solar energy. You'll get estimated expenses and savings, plus the annual environmental effect of embracing a solar energy system. To get started, all you need is your latest utility bill and address.
If you like what you see,, our solar experts will examine your home and offer a highly customized proposal for your solar system design. They'll also help you approximate how much power your solar panels would produce, your potential monthly savings, and much more.
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Cory O'BrienSenior Director - Growth MarketingCory brings over 8 years of solar expertise to Palmetto, and enjoys sharing that knowledge with others looking to improve their carbon footprint. A dog lover residing in Asheville, NC with his wife, Cory graduated from UCSB. If you run into him, ask him about the company he founded to rate and review beer!
