What are time-of-use (TOU) rates? How do they work?

Across the country, utilities are beginning to introduce innovative rate structures for residential energy consumers. These rate structures–from time-of-use rates to demand charges to real-time pricing–all have a common goal: to incentivize customers to consume energy when the cost of generating electricity is cheap and to disincentive energy consumption when the cost of generating electricity is high. As a result, understanding the ins and outs of a time-of-use rate can help you reduce your monthly cost of energy.

Time-of-use rates fall within a broader category of innovative utility rate structures that adjust the rate you pay for electricity over the course of the day. These types of rate structures, commonly referred to as time-varying rates, frequently follow a similar pattern. When both the cost of generating electricity and the electricity demand are low (i.e., in the middle of the night), the rate paid to use electricity is very low. However, when both the cost of generation and demand for electricity are high (i.e., on the afternoon of a hot summer day), the electricity rate is much higher.

Time-of-use rates may vary by season, on weekdays versus weekends and holidays, and across multiple periods over an individual day. For instance, as of 2023, Pacific Gas & Electric (PG&E) offers two residential time-of-use plans with different rates and peak hours. The on-peak period for the E-TOU-C plan is 4:00-9:00 PM every day, whereas the E-TOU-D plan offers a shorter on-peak window from 5:00-8:00 PM on the weekdays.

Time-of-use rates aim to better align the costs that electricity consumers see with the actual cost of producing electricity. Currently, most utilities update their residential electricity rates once or twice a year. That rate, expressed in dollars or cents per kilowatt-hour ($/kWh), is intended to cover the entire cost of generating the electricity consumers use.

However, a utility's cost of electricity changes throughout the day for various reasons. Traditionally, as demand for electricity increases throughout the day, so too does the cost of generating that electricity. Without a time-varying electricity rate, residential consumers have no window into how electricity costs rise and fall each day.

This is where time-of-use rates can add transparency: By adjusting the rate across the course of the day, week, or month, you can better understand the true cost of the electricity you use. Knowing when costs are higher and lower, you can begin to lower your overall electric bill by adjusting when you use electricity.

A standard electricity bill is straightforward to calculate: By multiplying the rate you pay for electricity by the amount of electricity you've consumed in a month, you can easily arrive at your monthly bill.

A time-of-use bill is a bit more complex to calculate but follows a similar process. Instead of multiplying your total monthly usage by your single electricity rate, you now must multiply the amount of electricity consumed during certain hours of the day by the rate specific to those hours. In practice, these differences mean that some customers may see immediate savings on their monthly electric bills without changing their behavior, while others will see increased bills without adjusting their electricity usage habits.

There are a number of ways to make the most out of a time-of-use rate. The simplest and easiest to implement is to use your appliances during the hours when electricity is the least expensive. Even slight changes could produce visible savings for customers who take the initiative to shift consumption habits.

In fact, for residential customers on PG&E's time-of-use rate, running your washing machine three times a week at 9:00 PM instead of 6:00 PM could save almost $12 annually on electricity costs. Repeat this process with other household appliances, such as your washer and dryer, and the savings add up quickly.

Investing in solar is another great way to decrease your exposure to peak pricing on time-of-use rates. Even more beneficial is an investment in solar-plus-storage. Many time-of-use rates have the highest cost in the middle of the day when your electricity consumption could be offset by electricity produced by a solar system on your property. Even if you're not home in the middle of the day, you can invest in a home energy storage system to ensure that more energy you consume in the evenings comes from the sun and not from the grid, even when time-of-use rates remain high.

TOU rates can be a complicated metering practice, so if you're curious about some of the key points to understand, check out our video on how time-of-use works at a high level:

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