Why Am I Paying More for Electricity During the Day?
by Mike Troupos
I live in Grand Rapids, Michigan, and our electricity provider rolled out a different way to bill residential customers this year. I kept hearing friends gripe about how Consumers Energy is increasing rates by 50%. As a professional who nerds out about energy, I was excited to hear others digging into electricity rates. What is happening here in Michigan is already best practice for many utilities on the US coasts. We are reaching a tipping point for these Time-of-Use (TOU) rates where soon every utility will be offering them in one form or another. So, let’s dig into what they are and how we got here.
What are TOU rates?
Simply put, TOU rates are a form of dynamic pricing. Electric utilities are not the only industry to roll out dynamic pricing; the hospitality, tourism, and public transit industries also have adopted this approach. The concept of dynamic pricing says the cost of a good or service will vary depending on demand over a given time. For the hospitality industry, you will find a ski town’s hotels will offer significantly lower prices during summer months than during winter months when everyone wants to go skiing.
Electricity demand is variable across the day, week, and season. Think about our roads and highways. During rush hour, traffic moves more slowly because there are too many cars on the road. In the middle of the night, there are so few vehicles on the road you can easily reach your destination without delays. In the same way, the electricity grid is most strained on hot summer afternoons because air conditioning is a significant energy consumer utilized when it is hot.
Why are utilities offering TOU rates?
Wholesale electricity prices in many areas of the country can be ten times higher in summer afternoons than weekend nights. In extreme cases, the differential between the highest and lowest cost times to procure wholesale electricity can be over 1,000 times higher. This has been the case since distributed electricity started in the 1880s; electricity load naturally varies. However, the utilities never had a reliable way to measure when in the day you were using electricity; they could only see your total consumption since they last read the meter the month before. So, utilities took an average of all their costs and applied a single price to everyone – regardless of when you used energy.
The smart electric meter was invented in the 1970s but only in the last decade has it gained mainstream use. With these smart meters, utilities know when you are using electricity throughout the day, allowing for TOU rates to be rolled out across the country in areas with deep smart meter adoption. With TOU rates, the idea is that consumers will respond to these supply and demand price indicators and run their dishwasher after dinner instead of after lunch – saving them money.
How do I make the most out of TOU rates?
Like all dynamic pricing models, the way to save the most money on TOU rates is to consume the most electricity during times it is the least expensive.
Some building use types naturally are set up to benefit from TOU rates. Think about a church; most churches use most of their energy on nights and weekends when electricity is less expensive. Naturally, some facility use types will inherently benefit from TOU because energy is consumed at low-cost times.
Beyond building function, you can control how the building operates. For most residential and commercial spaces, air conditioning consumes a large quantity of energy, and it typically consumes it during hot afternoons when electricity is expensive. One solution is to install smart thermostats like Nest or ecobee. You can program these thermostats to set back your AC during costly times of the day and pre-cool your building in the mornings before electricity gets expensive.
Industrial facilities have the most options to benefit from TOU rates. If a factory operates multiple shifts, the most energy intensive processes should be scheduled for low-cost times. Companies that run just one shift have even elected to start the shift earlier in the morning. This moves more electricity consumption into lower cost times and can improve employee morale as workers can go home earlier and avoid being stuck in a hot plant all afternoon.
Conclusion
Electric utilities continue to raise rates faster than the inflation rate. If you are willing to understand the available rates and optimize how you operate your facility, TOU rates offer one possibility for bucking the trend and decreasing electricity costs.