Lack of metering is no longer a barrier to the deployment of time-of-use (TOU) rates, since nearly 80% of households in the US now have smart meters. Uncertainty about customer response to TOU rates is no longer a barrier either since scores of pilots have been conducted with TOU rates, not just in the US and Canada but in many countries around the globe. They show that TOU rates reduce peak load and encourage shifting load from peak to off-peak periods.
While only 10% of households are on TOU rates today, that percentage was quite low just a decade ago. We may be at an inflection point when it comes to widescale adoption of TOU rates.
More and more customers are electrifying their homes with heat pumps for space heating and water heating, replacing their gas stoves with induction stoves, their gas -fired clothes dryers with electric dryers, and their gasoline cars with electric vehicles (EVs). Electrification, while good for the health of the planet, may drive up peak loads and raise costs for all customers.
With TOU rates, customers will have an incentive to reduce peak loads and shift them to off-peak periods. This would help them lower their bills and it also help lower utility costs.
Should TOU rates be deployed as the standard tariff, with an opt-out feature? Should they be mandatory? Or should they be offered on an opt-in basis? These options are not mutually exclusive. But they have to be executed differently.
Opt-in tariffs can have much sharper peak to off-peak differentials and will appeal to customers with EVs and who are flexible in when they run their appliances and flexible in how they set their thermostats. Unlike traditional TOU tariffs, they should also have shorter duration peak periods.
PSE&G in New Jersey has proposed two opt-in TOU tariffs that meet these criteria. One of them has two pricing periods and a milder peak to off-peak price ratio of 3:1. The other has three pricing periods and a sharper peak to off-peak price ratio of 7:1. Customers who enroll in these rates will be provided bill protection for the first year, to get them to try them out. These rates are illustrated below.
Other examples of opt-in TOU tariffs are provided by Ameren and Evergy in Missouri and Georgia Power in Georgia. For years, APS and SRP in Arizona have offered well designed optional TOU rates. They have achieved the highest penetration rates in the US: 60% and 30% respectively. OGE in Oklahoma has offered well designed optional dynamic pricing rates with a 10% adoption rate.
Opt-out tariffs are a recent innovation that have been enabled by years of experimentation. SMUD’s is the best example. It was tested in a pilot and eventually rolled out after much extensive customer education and outreach. Others include the three investor-owned utilities in California, Xcel Energy in Colorado, the two biggest IOUs in Michigan and PSEG Long Island in New York. Hawaiian Electric is also testing a rate which it hopes to deploy in an opt-out mode in a year or two. In Colorado, Fort Collins has successfully implemented a mandatory TOU rate.
The peak to off-peak price ratio across these utilities is shown in the figure below. The median value is 1.5. Ideally, the ratio should range between 2 and 3 to provide customers an opportunity to save money but it should not go above 3. When the tariff is deployed on an opt-out or default basis, most customers won’t even know that they are on such a rate and may end up paying high bills. Most won’t even know they can opt out of it.
A backlash can follow. Such a negative reaction has to be avoided at all cost. We can learn from the state of Missouri that came close to imposing a default TOU rate with a 5:1 ratio as the default but withdrew it in light of these concerns.[1]
