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Is time-of-use pricing fair? Experts weigh in

4 min read

The United States’ current utility model is at a crossroads: Stagnant electricity demand, advancements in energy technologies, battery storage and consumer cost-cutting programs such as net-metering incentives have driven many local utilities to adjust their business models so they continue to be profitable and relevant in the country’s energy system.

RELATED: What is the future of utilities?

One adaptation that utilities nationally have begun to implement is time-of-use (TOU) pricing, also called demand charges. Local utilities in California, Arizona, Massachusetts and other states have adopted TOU pricing as a means not only to combat falling revenue but also to ensure that they have the necessary finances to keep the energy grid running.

But is time-of-use pricing fair? Critics of the system argue demand charges are just a way for utilities to make more money, while advocates claim demand charges give customers more control over their bills and can even help the environment.

What is time-of-use pricing?

In regulated and deregulated energy states alike, utility companies are responsible for the delivery of power to homes and businesses in their surrounding areas. Additionally, utilities maintain community power lines, respond to electrical emergencies and power outages and operate power plants.

To carry out their duties, utilities typically charge customers based on the amount of energy they use per month, measured in kilowatt-hours. Energy rates tend to increase during hotter and colder months (often referred to as peak months), when more electricity is being consumed.

Time-of-use rates are different. Demand charges, as the name suggest, fluctuate throughout the day; this allows utilities to charge customers not only based on how much energy they consume, but when they consume it.

Andrew Gong, Research Engineer at Aurora Solar, an industry leading solar design software used for sales design and remote shading analysis, explains, “TOU pricing increases electricity prices during afternoon and early evening hours. Households that are reliant on electric stoves, water heaters, or need to use air conditioning in the afternoon may see increases in bills when on TOU schedules compared to the standard tier-based structure.”

During off-peak hours, which typically fall at night when the lights and electronics are off, electricity is cheaper. During peak hours, like in the daytime and early evenings, electricity costs more because there is higher demand.

Gong also points out that peak pricing is most evident during the summer months. He says, “There’s less of a difference in winter months, so customers with electric heating needs aren’t as affected as customers with air conditioning needs.”

Why do utilities implement TOU pricing?

The simplest reason for utilities’ employment of time-of-use pricing is that it costs more to meet consumers’ electricity needs during peak demand hours. When more people are consuming energy at the same time, more power plants need to be operating to meet that demand.

Dr. Travis Simpkins, CTO of muGrid Analytics, a company that provides techno-economic analysis of energy projects to developers, utilities, and component manufacturers, argues that demand charges are even better for customers than the standard utility pricing model. “The reality is that utilities are already paying real time prices… A flat-rate tariff as has existed for decades is really just an average of this real-time price over the course of the year. So, in fact, it is not fair to consumers — if somebody uses electricity at night to dry their clothes when it is cheap, they should pay less for their electricity that than their neighbor who is running their AC at 6 PM.  TOU pricing allows for that.”

By charging customers more for their energy during peak hours, utilities can reward consumers who limit their energy usage during those times. And, by limiting customers’ energy consumption, time-of-use pricing can actually alleviate some of the harmful effects that running the power grid have on the environment.

Time-of-use pricing also helps utilities begin the transition to “the utility of the future.” Dr. Simpkins explains, “In a world where most houses have solar, batteries, and other technologies, the utility will be more of a grid operator, rather than energy supplier.” The switch to TOU pricing allows utilities to prepare for a future in which consumers are their own suppliers.

Demand charges don’t have to hurt customers

Opponents of TOU pricing argue that the model puts low-income energy consumers at risk of spending even more on their energy bills; but a bill introduced to the California Assembly in late February addresses these concerns and offers other communities a road-map to avoid disadvantaging already-vulnerable citizens.

One recommendation laid out in the bill is to provide funding to low-income communities for efficiency upgrades and energy innovations; products such as smart thermostats, energy-efficient appliances and rooftop solar panels can go a long way to mitigate peak-demand charges. Gong also asserts that advancements in battery storage will further offset consumer costs: “The difference in off-peak vs on-peak pricing isn’t drastic enough to incentivize increased adoption of energy storage… As energy storage becomes cheaper we may see a wider adoption of battery systems so homeowners can self-supply during nighttime peak hours.”

How do demand charges affect EV owners?

Another concern with time-of-use pricing is that it could discourage people from purchasing electric vehicles that must be charged. While some environmentally conscious drivers believe the demand charges for electric vehicles are worth it to preserve the environment, many are wary of purchasing an expensive electric vehicle that will become even more expensive due to TOU rates. This is another problem that state lawmakers can address – especially in states that highly value environmental protection.

RELATED: How are electric vehicles changing state policies?

The New York Power Authority, for one, is leading the charge for electric vehicle owners. With a state-wide goal to have 800,000 electric vehicles on the roads by 2025, the NYPA is urging New York regulators to remove demand charges from public EV charging stations; citing a 2017 study by the Rocky Mountain Institute, the NYPA emphasizes that demand charges at public EV stations will hinder New Yorkers from purchasing EVs, and will ultimately make the state’s 2025 goal unattainable.

If more states follow the examples set forth by New York and California, time-of-use pricing can benefit utilities, their customers and even the environment.