#1 cleantech news, reviews, & analysis site in the world. Subscribe today. The future is now.

Energy Efficiency

Published on June 8th, 2015 | by Rocky Mountain Institute


California Rolls Out Default Time-Of-Use Rates

June 8th, 2015 by  

Originally published on RMI Outlet.
By Laurie Guevara-​Stone

blog_2015_06_05-1California’s three largest investor-owned utilities will soon go through a major electricity rate reform. Currently the state uses a four-tier inclining block rate in which heavy electricity users push into the upper tiers where they pay quite a bit more for those excessive kilowatt-hours. On the other hand, smaller electricity users remain in the less-expensive tiers.

Following passage of AB 327 in 2013, the California Public Utilities Commission (CPUC) is working to replace the four-tier structure with a two-tier or a three-tier structure. The price difference between the tiers would be no more than 20 and 33 percent respectively. While this would seem to discourage conservation and efficiency, and reduce the economic incentive for installing solar for the higher energy users, the proposal also includes a shift to time-of-use (TOU) rates by 2019. TOU rates could change the entire equation, giving customers an incentive to shift their loads to off-peak time periods, lowering their bills while also helping the utility company shave peak demand.

Flattening CA’s rate tiers—economic impacts for customers and solar

In California’s current four-tier pricing structure, rates range from about $0.13 per kilowatt-hour for the lowest tiers, to as high as $0.33 per kilowatt-hour for the highest tiers. This scenario encourages conservation and efficiency among the highest users, and also means investing in solar for those high users makes economic sense. But many argue that users aren’t paying the true costs of their energy consumption. “Customers in top tiers, even after they install solar, are still paying more than the cost of their energy service, and thus are subsidizing the lower users,” according to RMI Senior Associate Matt Lehrman.

Thus the change to the new structure. While the proposed two-tier and three-tier structures will lower bills for the highest energy users, they could very well raise bills for the lowest energy users, raising the ire of many environmental and consumer advocates. Environmentalists argue that higher energy using customers will have no incentive to conserve, and consumer advocates argue that low-energy users will be unfairly burdened. And many wonder how this change will affect solar economics. “It changes the equation for customers,” says Lehrman. “Depending on what tier you’re on, the efficiency incentive could get better or worse, and the economics of going solar could get better or worse.” But what could really benefit all classes of consumers is the change to default TOU rates.

Rolling out wide-scale time-of-use pricing as the default

“Cross-subsidies are prevalent throughout the electricity system, and appropriate compensation for the benefits and costs of distributed solar is the subject now of vigorous debate,” says Lehrman. “But there’s no doubt that moving to default time-of-use rates gets customers closer to their true cost of service. Then customers have better price signals that can increase deployment of DERs, reduce bills, and improve grid operation.”

TOU rates take into consideration differences in the cost of producing and delivering electricity throughout the day, charging a higher price during peak hours (usually a handful occurring at the same time each weekday) and less at all other times. The proposal orders California’s three investor-owned utilities—Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric—to start TOU pilots by next year, and to make TOU rates the default structure in 2019.

Some of these utilities already offer an opt-in time-of-use rate for residences. But making TOU the default residential rate might have the largest impact, as seen in a pilot project run by the Sacramento Municipal Utility District. “This is the first example of TOU pricing being the default at scale,” according to RMI Senior Associate Mark Dyson. “It’s a great step in the right direction, to help people align their consumption with low-cost generation on the grid.”

Analysts have expressed concern that traditional TOU rates are highest in the afternoon, and if that ends up pushing load to evening hours, it could hypothetically make the infamous duck curve worse. However, it’s not that simple. The duck curve shows what will happen when more solar PV is integrated into the grid on a sunny spring day with low temperatures and thus low air conditioning demand. Growing rooftop solar output during the middle of the day suppresses net grid demand, deepening the belly of the duck. But when solar output drops off at the end of the day and electricity demand peaks as people get home from work, it creates an even steeper, taller neck, leading to a huge ramp up need. Time-of-use rates that discourage daytime consumption could potentially aggravate this issue.

There are, however, ways to address this. “If you have the same TOU rates every day, you might make the duck curve worse on a few days, but most other days you could make it better, because TOU rates do line up with air conditioning peaks,” according to Dyson. This shows the importance of TOU rates moving in time in order to address its interaction with the duck curve. “As solar becomes a larger part of the California electricity system, TOU pricing blocks need to change to reflect that,” says Dyson. In fact, with growing rooftop solar, a day is probably coming when we’ll likely need more-differentiated TOU rates, ones that “pull” some customers’ demand to coincide with rooftop solar generation and ones that “push” other customers’ demand away from grid peak to off-peak hours.

An important role for load shifting

With a shift to time-of-use pricing, customers are encouraged to change the timing of their electricity use, lowering their bills while also providing benefits to the utility company by reducing peak load. Most importantly, the technologies to enable this load shifting are low-cost and widely available today. Shifting loads from peak to off-peak, low-cost times could be accomplished by precooling a home to avoid running an air conditioner during grid peak periods, or using the large storage tank in your water heater to heat water only at night, all with no disruption to comfort or service quality.

Combined with load shifting, TOU pricing can benefit customers by empowering them to reduce their bills with technology-enabled, seamless control technologies that can avoid energy use during expensive peak hours. As TOU rates evolve to reflect the reality of the duck curve and the increasing role of solar in California’s electricity system, customers can be encouraged to shift more load to hours of rooftop solar output, eliminating the steep ramping periods and high evening peaks that system operators fear. More sophisticated rate structures, as advocated for in eLab’s Rate Design for the Distribution Edge, are important to incent more optimal distributed energy resource adoption and grid integration, which can help lead us toward a lower-carbon, reliable, resilient, affordable future of electric service, and a win-win situation for both utilities and customers.

Reprinted with permission. Image courtesy of Shutterstock.

Tags: , , ,

About the Author

Since 1982, Rocky Mountain Institute has advanced market-based solutions that transform global energy use to create a clean, prosperous and secure future. An independent, nonprofit think-and-do tank, RMI engages with businesses, communities and institutions to accelerate and scale replicable solutions that drive the cost-effective shift from fossil fuels to efficiency and renewables. Please visit http://www.rmi.org for more information.

  • Mark

    It seems to me TOU will disincentivize solar panel use.

    The expensive power and TOU shift will move to after the sun goes down, when solar production is low, and solar users will have to rely on the grid when TOU is expensive.

    • Bob_Wallace

      Correct. At some point there will be enough solar on the grid for the cost of electricity during sunny hours to drop as low as late night prices. It’s already happening in Germany.


      • Bob_Wallace

        Sharper image…


      • Mark


        So am I right to say, it will disincentivize solar installations, because the electric companies will end up hitting solar users with the expensive TOU time (after sunset), thereby denying solar users a real advantage.

        • Bob_Wallace

          I would go so far as to say that it could happen.

          And by setting higher fixed ‘connection fees’ the value of behind the meter solar is decreased.

          I started questioning the future of residential solar some years ago. I suspect many utilities would prefer to own the solar themselves. And it may be so much more affordable to install at the utility level that residential will have little value aside from what a house can directly consume.

  • Lou

    This will come to be known as Hydro’s largest rip off of its’ customers. Proven in Toronto, Canada.

  • eveee

    Lets have retail rates follow wholesale rates. There is no sense in trying to find a fixed retail rate system. Electric rates are dynamic, not fixed. They need to follow wholesale.
    The heart of the problem that causes cross subsidies. Loosely speaking, TOU is an attempt to match retail with wholesale, but it fails if it is fixed year round. The root of that dilemma is the PUC system that is a slow, bureaucratic system that cannot keep up.
    Now I am going to tell you why I am not crazy about a system based on wholesale rates. It can be gamed. Its already been done by Enron.
    Ideally, a system based on wholesale rates is good. In the real world, we have to deal with giant corporations that can bend the rules to their advantage and have too much power.

    • Frank

      If net metering is in place with TUO, and the number is the same whether you are putting power on the grid, or taking it off, then the more they manipulate prices, the greater the incentive they will be giving people to own solar panels and batteries.

      • eveee

        Utilities manipulate prices in whatever way they see to their advantage that they can get the PUC to go along with. Consider that right now in California, the utilities reap daytime premiums from TOU customers despite having an energy surplus and even negative wholesale pricing due to solar. Profiteering.

        Now what will work out best for solar and how? Thats so complicated and depends so much on circumstances that there is no one answer.
        The problem is that actual utility costs are always distributed by cross subsidization. And there is always a fight over who pays. Guess what. Large consumers always get the lowest rates. I mean Cal water pumping, and aluminum smelting etc.

        • Frank

          I”m not disputing any of that, but if I have solar pannels on my roof, and if they are charging 20 cents per kwh instead of 10 when the sun is out, and they have to credit my bill with 20 cents for what I am feeding back with net metering, then they will be shooting themselves in the foot. They will be better off giving me an incentive to buy a battery and feed that juice back later, like when the sun starts to go down.

          • eveee

            I think your comment shows how incredibly complicated it all is.

            Net metering is intended to balance your generation vs consumption so your bill is effectively canceled. Anything net you use gets paid at retail. Anything you sell back as overage is at wholesale.

            Usually and with a lot of asterisks and exceptions.

            So, no, I don’t think they ever pay you 20c/kwhr.

            And I don’t know where to go with battery storage vs. net metering. My first inclination is that if you have net metering, it is like a battery and there is little incentive to add storage.

          • Frank

            I was suggesting they implement a more complicated net metering, where you are netting dollars(TOU price x KWh) instead of KWh. This would be most efficient. Obviously, it takes time to adjust to the new environment, but the sooner you build the best environment, the better.

          • Bob_Wallace

            TOU wholesale for fed in electricity?

        • GCO

          California utilities have surplus and negative wholesale price due to solar?? You seem to be very mistaken, or just making stuff up.

          • eveee

            GCO – I will call your bet and raise..

            Spot wholesale electricity turned negative in California as solar and wind generation topped forecasts, a signal to suppliers to reduce flow.

            Wind turbines produced 1,537 megawatts during the hour ended at 1 p.m. local time, more than double the forecast, according to data from the California Independent System Operator Inc., which manages the state grid. Solar output topped projections by 10 percent with 2,492 megawatts during the period.


            That was 2014 and solar capacity was a measly 2.5GW. Now its 6GW.


            Take a look at it daily. Educate yourself.
            And please.

            I do make some mistakes. But don’t be so careless as to call my bluff and assume I don’t do a lot of reading and research.

            You are liable to look silly.

        • Lou

          Will the new Tesla storage battery change our future dependency on corrupt utilities?

          • eveee

            Lou – No doubt. That is already changing with rooftop solar. Musk is intent on disruption. Yay to that. Just about everyone is fed up with megalopoly abuse.

      • Lou

        Except in some states Hydro utilities have been able to veto solar usage or have customers penalized for making the switch.

  • Ronald Brakels

    We have time of use tariffs in Australia, which are generally optional, and they are very useful for making home energy storage pay for itself. Here the Tesla Powerwall will come equipped with software from Reposit, an Australian (?) company, that will allow people to buy and sell electricity on the spot market. That means that during critical peaks they could supply electricity to the grid and get over $11 US a kilowatt-hour for it, and at times they will be paid a small amount to take energy from the grid and store it. As the amount of energy storage increases this will reduce the difference between in price between peak and off-peak time of use tariffs and all else equal this would discourage further installation of energy storage, but I am certain that the cost of energy storage will continue to fall and here at least it wil be worthwhile for a long time to come.

    • Curly

      Ronald, where can I sign up for TOU? I’m in Vic.

      • Ronald Brakels

        AGL, Red Energy… take your pick. I think they all offer them. I take you have a remotely read (not so) smart meter? You’ll need one of them for a time of use tariff. But if you’re goal is get on-grid storage from a Tesla Powerwall, the bad news is that since Victoria has the cheapest electricity prices in Australia, it won’t pay for itself. (Unless of course there is something weird about electricity prices where you live that I am unaware of.)

        • Curly

          No Powerwall or even solar for me, just renting. We do have a smart meter. I’m currently signed up to Meridian, but was previously keen to switch to TOU, was just waiting for someone to tell me it was available, Origin certainly didn’t. Thanks, I’ll check it out!

          • Ronald Brakels

            Good luck. But if you are going through Powershop with Meridian you may already be paying a time of use tariff. But I’m not familiar with Victoria and I don’t know how they work.

  • Frank

    If you make time of use dynamic as Jim suggested, and of course give “dryers” access to the price, then you will be providing the incentive to create such a “dryer” and to buy one. I agree with Jim. The electric company can display averages on their web site, and the current number till then.

  • wildisreal

    If CA is going to TOU in 2019, why bother with the tier reduction? Just get on with it folks…TOU in 2016!

    • Mike Dill

      TOU needs to be linked with peak demand, and California is not there yet. When there is a peak demand charge, Then the tiers will not matter.

  • TedKidd

    Nicely written.

    “…moving to default time-of-use rates gets customers closer to their true cost of service. Then customers have better price signals that can increase deployment of DERs, reduce bills, and improve grid operation”


  • Jim Smith

    why is TOU not fluid with supply/demand?

    • Bob_Wallace

      That would require some sophisticated hardware that we don’t have in place.
      Right now utilities can do simple TOU billing and people can decide to not run their clothes dryer or charge their EV during high rate periods. Later on we may have small enough grids and appliances/chargers to allow optimizing supply:demand ratios.

      • Jim Smith

        don’t the utilities already have to know to spin up peaker plants?

        • Bob_Wallace

          Yes, but your clothes dryer doesn’t.

          • Jim Smith

            not sure what that matters. The utility does not care when your clothes dryer runs…it just sees additional load…demand increasing. they increase generation as needed which drives up the cost.

          • Bob_Wallace

            “they increase generation as needed which drives up the cost.”

            That’s the point. Some/many utilities want to reduce their need to access expensive peaking sources.

            If they implement TOU billing then consumers are likely to change their behavior and move what load they can to lower rate time periods.

            Right now some utilities pay large industry such as wood pulp mills to turn off when supply is stressed. That’s cheaper for them than building new gas peakers that will get used a couple afternoons a year.

          • Jim Smith

            but that is the point. demand base pricing accomplishes the same thing along with being fluid. if you fix usage to time of day, usage patterns shift to lower cost times getting things back to where they were.

            Then the utilities will have to manually change the TOU billing structure to account for the demand shifting. Demand based billing ensures prices are always in line with supply

          • Bob_Wallace

            ” if you fix usage to time of day, usage patterns shift to lower cost times getting things back to where they were.”

            That’s the goal.

            But not back to where they were, but better than they were. Move demand to when supply is more available/less expensive.

            Avoid building new peakers or purchasing expensive peaking power.

          • Jim Smith

            sure it will go back to a huge demand spike to when rates are lowest.

          • Bob_Wallace

            Fine. Then adjust rates so that demand once again matches lowest cost supply.

            Why can you not grasp this very simple concept, Jim?

          • Jim Smith

            so you agree with me on demand pricing. You just think it needs to be a manual process which does not really match demand. I am saying it should match demand without having to hardcode time into it.

          • Ivor O’Connor

            My two cents. In an ideal world we’d have your system Jim. It would be like a 24×7 stock market. Somehow this information could be tapped into and your appliances could function according to some criteria you set up. However that’s so far into the future Bob rightfully does not consider it an option. Yet.

          • Bob_Wallace

            Right now is has to be “hardcoded” simply because our clothes dryers and dishwashers are not smart enough. The price signal has to be simple and easy to communicate in order for human operators at the consumption level to adjust TOU.

            Later on, with smart appliances, TOU can be dynamic. Cars sit parked 90% of the time. Drivers don’t care when their EV is charged as long as their minimum miles* are in place when they climb in. Car charging can already be controlled by cell phones. With more EVs on the grid we are likely to see utilities giving drivers special rates if they allow the utility do determine the exact minutes in which charging occurs.

            * Someone’s minimum might be enough miles to get to the hospital at any time. And enough range at the beginning of their day to do their normal daily drive + a safety cushion.

          • Omega Centauri

            I think consumers won’t want demand based TOU. They want to know how much it costs when according to some schedule. Ask them to respond to dynamic prices, and that would be several steps too far.

          • Bob_Wallace

            Dynamic pricing would require automation, taking the consumer out of the loop in terms of minute to minute/daily operations.

            Imagine if your pool filtration system was smart enough to run when rates were low and not when they were high. You wouldn’t care when the filter pump ran, just whether the pool was kept clean enough. There are several power uses in homes and businesses that don’t need to run at a specific time as long as performance is kept within acceptable limits.

          • Aku Ankka

            I was about to mention this too — beyond technical part, which has its challenges, but is doable merely from supply side, there is the human part. Even if this did lead to lower prices, most customers are very suspicious of having someone change prices without their explicit knowledge.

            It’s bit like tax rates, also, in that while it’d be trivial to have smooth functions for tax rates, most countries still have coarse step functions, partly for legacy reasons (half a century ago, it would have been technically challenging), but mostly really because most tax-payers are math-sceptic and think of such things as fuzzy and complicated.

          • Bob_Wallace

            Offer a rate that guarantees a percentage per kWh savings. Some will sign up. Over time more will likely understand and sign up. Conspiracy-heads may never, but they aren’t a large part of the population.

          • Aku Ankka

            There are ways to and I am not arguing against going there. I think we all agree that dynamic pricing is the way to go.
            I just wanted to underline this other significant reason why utilities move slower (besides plenty of red tape in some US states) than they would otherwise.

            This cognitive challenge is pretty common, too; witness how most US cell phone pricing (well and regular landlines too) is based on package deals. For most users usage-based fees could be much cheaper, but they are not nearly as popular (I had my pre-paid phone up until 2 years ago, and only gave up since it’s bigger hassle with smart phones) for … well, irrationality in my opinion. It just seems “safer” to most consumers to pay a fixed fee, instead of variable rate. Even if factually you are much more likely to end up overpaying.

          • eveee

            No. Demand based pricing is just another utility ripoff. One residential customer more or less randomly running a dryer and washer at the same time on a Sunday in April is meaningless. A whole city running air conditioning on August 18 afternoon heatwave, is a real cost concern.

            The real cost to utilities is based on the hottest day of the year with the peak air conditioning load. That day determines next years generation and transmission cost outlays because it determines how much capital equipment must be bought to make sure power is provided for that one day. Power capital equipment is expensive.

            Other days with peak loads are also expensive because a gas peaker that runs very infrequently must turn on and be used. Thats costly.

            Solar is worth its weight in gold because it reduces those peaks.

            If TOU followed wholesale prices it would send signals to the user to drop loads and save money on capital equipment.

            But as Bob says, the mechanisms are not in place to broadcast that information.

            Its a shame, because its technically feasible. Forget manual shifting. We have the internet and smart inverters and with Nest and others, increasingly smarter loads.
            Thats intelligent real time demand management. Not here yet.

          • Jim Smith

            “Demand based pricing is just another utility ripoff.”

            Totally disagree. Everything should be demand priced as it reflects true market conditions. While running two dryers is not even a blip on the utilities radar, running 200,000 dryers while running 200,000 AC units certainly is.

            “But as Bob says, the mechanisms are not in place to broadcast that information.”

            that is nonsensical. A simple web page/phone app/etc… could alert you to pricing, if you cared about it.

            “If TOU followed wholesale prices it would send signals to the user to drop loads and save money on capital equipment.”

            replace static TOU with fluid demand pricing and let the market work, no bureaucrats needed. and no guess work in the marketplace as to what the new rate structures will be to offset the artificial distortions from the central planners.

          • Bob_Wallace

            “A simple web page/phone app/etc… could alert you to pricing, if you cared about it.”

            So you’re suggesting that people should check in on their cell phone before doing a load of laundry or plugging in their EV?

            That’s too much effort, Jim. For a pricing system to work it needs to be simplified. TOU is a simple program. Electricity between noon and 7 PM is more expensive than power between 7 PM and midnight and power between midnight and 7 AM is cheap.

            That’s a system that people can understand. And, if they want to save some money, follow. A more complicated system needs automation or it will only be used by the sort of guys who put cardboard in the bottom of their worn out shoes so that they can wear them another few years.

          • Jim Smith

            “So you’re suggesting that people should check in on their cell phone before doing a load of laundry or plugging in their EV?”

            not at all. there is no service rationing. The problem is, TOU billing is nothing more than price fixing and does not address the problem….the price of electricity is not connected to its market value.

            TOU, in the short term will shift usage to “off peak” hours. In the medium to longer term, the “off peak” becomes the new “peak”. Now you need to fix the prices, i mean change the TOU back to what it originally was. So the process repeats. This happens because the pricing is disconnected from the market value.

            Rather than a short term thinking, we need long term thinking.

          • Bob_Wallace

            TOU is a short term solution.

            More dynamic pricing awaits technological changes. Our “stuff” has to get smarter.

            A short term solution is better than doing nothing. And we are not going to move massive amounts of demand from afternoons to late night. What we can accomplish is moving some demand out of peak hours and lower the overall cost of electricity.

          • eveee

            Depends on what you mean by demand based pricing. Its not your demand that matters. Its everyone else’s. If you turn on three high draw devices at midnight the utility doesn’t care. If you turn on your air conditioner at 4PM on a heat scorching day when everybody else does… then it matters.

            Could alert you, yes. Does it exist, no. Still the idea of responding manually is daft. What are you going to do, drive home in rush hour traffic and change the setting on your thermostat?

            No. You are going to get a Nest or other device and have it talk to other smart appliances. Its called demand management. It needs to be seamless and require nothing more from you than a few menu choices about what kind of energy user you want to be and how you want to be optimized. TOU, etc. Then the utility broadcasts rates and your computer controller responds in real time all without your need for interaction.

            Yes to this next.

            “replace static TOU with fluid demand pricing and let the market work, no bureaucrats needed. and no guess work in the marketplace as to what the new rate structures will be to offset the artificial distortions from the central planners.”

            add in real time without user interaction other than to choose optimization choice.

          • Jim Smith

            “Depends on what you mean by demand based pricing. Its not your demand that matters. Its everyone else’s.”

            FALSE. your demand is aggregated with all demand. That is how markets work.

            “No. You are going to get a Nest or other device and have it talk to other smart appliances.”

            No. this has nothing to due with demand based pricing.

            When energy costs are truly reflected, people will undoubtedly make smarter decisions around their energy use and buy “smart” appliances.

          • eveee

            Its bad communication. We are saying the same thing. When all the utility customers demand at the same time, thats a big load and cost.
            If you demand a lot all at once and nobody else on the grid does, it hardly matters.
            Demand charges can be made to charge you for capacity at your single residence. If they do, they are BS. It matters when, not just how much.
            Thats why TOU makes more sense.

          • eveee

            I don’t know if you understand what the utilities have in mind for demand based pricing. IMO, they want higher pricing for any excess demand from an individual residence no matter what the time of day or whether other users are having high demand. Thats a ripoff. Pure and simple. There is no additional cost to the utility for a random individual residence capacity event at 4AM. In fact, they are dying to have customers sweep up their excess capacity then.
            And thats no the only time. With solar, daytime energy surpluses are leading to negative wholesale rates. Those are times when energy use is encouraged.

          • GCO

            True for most loads indeed. Some dryers already do automatically sync with peak wind and solar though… 🙂


          • Bob_Wallace

            I’ve been using a low cost version of that for a long time. My current dryer cost me under $1 about 15 years ago. Plus a couple dollars in clothespins…

          • Omega Centauri

            Im getting more and more pushback against solar drying at home. The energy hungry dryer fluffs up the clothes and makes them feel soft to the touch. I say, it does that by breaking fibers and wearing out the clothes faster, but noone wants to hear that.

          • Bob_Wallace

            Sun dry, toss them in the dryer for a quick, low heat/no heat fluff up.
            Best of both worlds. The fresh smell of sunshine and softness for tender butts.

          • eveee

            I do. Lead on. We need to know what consumerism is all about.

          • Lou


          • Marion Meads

            Wrong Bob! There are programs where for a huge discount on your bill, PG&E installs a switching device on your appliance hogs that they can remotely turn on or off dependig on demand.

            I have seen such devices installed on my neighbor’s electric dryers and HVAC compressors.

          • Bob_Wallace

            News to me. But the last time I had a PG&E bill was in the late 1980s.
            Got details to share? CT needs to run an article.

          • GCO

            I’ve seen that PG&E offers this for AC units only, not for other appliances => http://www.pge.com/en/myhome/saveenergymoney/plans/smartac/index.page
            I can’t find that “huge discount” either, just a one-time 50$ credit. Please enlighten us.

Back to Top ↑