Critical peak pricing: What you need to know

As we continue to move towards a more modern grid–and a more educated electricity user!–utilities across the country are beginning to introduce electricity rates that better align the price we pay for electricity with the cost of producing it by varying the price of electricity based on the time it's consumed. Critical peak pricing (CPP) is one such time-varying rate plan that charges more for electricity during certain periods of peak demand but also allows you to lower electricity spending–and even receive bill credits–by reducing usage during these times.

Electricity is a unique commodity that we generate using many different fuel sources, meaning that a kilowatt-hour (kWh) of electricity produced by a natural gas power plant will cost a different amount than a kWh generated by a coal facility, a nuclear power plant or a wind or solar farm. Grid operators are charged with offering the lowest cost, reliable service to electricity customers, so, as much as they're able to, grid operators try to first rely on the least expensive forms of generation (typically renewable resources, nuclear, and, recently, natural gas generation) before moving towards more expensive methods of producing electricity (like from coal or oil).

But as demand on the grid increases, grid operators run out of renewable resources, nuclear power plants, and gas power plants to call upon, meaning they are forced to ask more expensive power plants to operate in order to keep the lights on. As demand for electricity increases, so too does the price of every kWh of electricity generated. Incidentally, something similar happens with the cost of transmission (i.e., getting electrons from power plants to our wall sockets), where the price associated with moving an electron across the grid will increase as demand for electricity increases and the available supply of transmission capacity remains unchanged.

However, most utilities historically charged a flat rate for the electricity we use to power our homes and businesses: no matter when you used electricity, you'd pay the same rate. If your rate was 10 cents per kWh, paying for electricity on a flat rate means you'd pay 10 cents regardless of whether you used a kWh at 3 pm or 3 am.

Time-varying rates–like those included in a critical peak pricing plan–are designed to better align our electricity consumption habits with the true cost of producing electricity at different hours of the day. This has two major implications: first, it is a way to help electricity users–whether residential or industrial–better understand how their usage patterns impact the cost of electricity; second, it is a way to reduce the price of electricity for all consumers at times of lower demand, potentially leading to bill savings for educated and engaged consumers.

Critical peak pricing plans are pretty simple: after opting into this rate, your utility company will charge a much higher rate than usual during select critical peak events in exchange for a discount on all other electricity you use during the rest of the season. The idea is that by more closely aligning the rate you pay for electricity with the cost of producing electricity on the select few, most expensive days of the year, a critical peak pricing plan can both lead to behavior change to reduce your own bills and to reduce the demand on the system overall, lowering prices for your neighbors at the same time.

Utilities differ in their approach to the program structure–i.e., what qualifies as a critical peak event, how many events will be called per year, what the extra surcharge is for using electricity during a peak event, and what the standard discount is–but generally here's what you can expect:

• Typically, utilities or grid operators call critical peak events during summer months (i.e., June through September) when they are forecasting high demand, high prices, or a shortage of electricity supply.

• Generally, critical peak pricing plans will call no more than 15 or 20 events over the course of the year or season, lasting no more than four hours on any given day.

• Utilities will send you notifications the day before to let you know that the following day will be a critical peak pricing day so you can be prepared to reduce your usage.

• The critical peak pricing rate could be as much as double what you would otherwise pay for electricity while a critical peak event is in effect.

• In exchange for agreeing to pay more during peak events, utilities discount the rate you pay for all of the rest of the electricity you use over the course of the season. While discounts vary by utility, they may be up to 10 percent: in Arizona, APS's CPP rider provides a 1.2 cents per kWh discount for all other electricity for four months, which is a little more than a 10 percent discount off their standard residential flat rate.

Critical peak pricing plans are available to homes and businesses in certain states and utility service territories, including Arizona, California, and Nevada – if you're interested in participating in one, check your utility's website to see if they provide this type of rate.

Because critical peak pricing plans charge you more for electricity during certain, defined periods of peak electricity demand and prices, saving money on a critical peak pricing plan requires you to reduce how much electricity you consume from the grid during peak periods. There are two main ways to do this: either to reduce your consumption or to offset your need for grid energy with solar and storage.

Reduce your usage

Your monthly electricity bill is the product of two things: the rate you pay for electricity and the amount of electricity you use. While you likely cannot change the rate you pay for electricity, you can change the amount of electricity that you use throughout the month. Outside of changing your behavior and usage patterns overall (which is certainly an option if you want deep savings on your bills!), there are three main ways to reduce your electricity consumption:

1. Improve your insulation – the largest single source of electricity spending in the U.S. is typically heating and cooling costs. By improving the insulation in your home, you can reduce how hard your HVAC system works to heat or cool your home. The best part? A lot of state-level efficiency programs offer this service for free!

2. Upgrade to energy-efficient appliances – outside of heating and cooling, typically, the next largest source of electricity spending comes from larger household appliances, like your refrigerator or hot water heater. By upgrading to more efficient appliances, you can significantly reduce the amount of electricity each of these appliances uses.

3. Kill vampire loads – in a lot of instances, there may be appliances, chargers, or other devices in your home that are sucking electricity from the grid even when you're not actively using them. The electricity consumption of these so-called 'vampire loads' can add up quickly, meaning you can see serious savings just by identifying and 'killing' these vampire loads.

Install solar and storage

On its own, solar is a great way to reduce your electricity bills, regardless of whether you're on a flat rate or a time-of-use rate. If the peak periods on your utility's critical peak pricing plan align with when your solar is producing the most electricity (i.e., mid-to-late afternoon on summer days), then you can likely avoid paying peak rates just by installing solar alone.

If, however, peak periods occur later in the day (i.e., after 5 pm) when the sun is setting and your solar panels aren't producing as much electricity, the best way to reduce your exposure to critical peak pricing is to pair solar with storage. That way, you can store your excess solar electricity in your battery when rates are low and pull from your battery instead of from the grid when rates spike. Effectively, pairing solar with storage allows you to play intraday arbitrage of energy rates.

If you're interested in saving on your electricity bills, EnergySage is here to help. Whether you're on a flat rate, a time-of-use rate, or a critical peak pricing plan, installing solar (and storage!) can help reduce your reliance on the grid, lowering your monthly electricity bills at the same time. To get started exploring whether solar is the right solution for your situation, sign up for a free account on EnergySage today to receive custom solar quotes from up to seven solar companies in your area. Compare the quotes from the comfort of your home with or without the help of our Energy Advisors, and select the installer that's right for you.