Take a look at your electric bill. If you’re like most Americans, you’re probably paying the same rate for electricity each hour of the day and each month of the year.
- Consumers aren’t currently motivated to use electricity when it’s cheapest for the grid
- Time-varying rates could save consumers money
- Wind and solar would benefit from revised rate pricing
What you won’t see is how the true cost of generating electricity varies on an hourly, daily, and monthly basis. For example: supplying enough electricity to power air conditioners on the hottest summer afternoons may require power plants to be built and maintained that aren’t used for the other 360 or so days of the year.
But most consumers don’t see any variation in the electricity rates they pay, and so aren’t motivated to change their habits. The result is an inefficient system that costs too much and generates more carbon pollution than necessary.
Time-varying electricity rates that fluctuate based on supply and demand can help. By pinning the cost of electricity to its true economic impacts, we can increase the grid’s efficiency, decrease costs, and better utilize clean power sources like wind and solar.
One of the simpler forms of time-varying pricing, “time-of-use rates,” uses predictable, predetermined rates that are higher or lower depending on peak or off-peak hours.
Consumers could respond to these price signals (choosing, for example, to run appliances during off-peak hours) and lessen demands on the grid. Smart appliances that automate when and how they use electricity could offer even more cost-savings.
Critical peak pricing
Just a few times a year, usually during the hottest summer afternoons, the electricity grid experiences peak events, wherein power plants are needed that aren’t used during the rest of the year—an exceedingly expensive and inefficient way to manage the system.
Critical peak pricing works by alerting consumers, typically with a day’s notice, that a set number of upcoming hours will include “peak pricing.” Customers who enroll in the program are incentivized to defer or decrease their use during those hours, and in return receive lower rates the rest of the time.
One of the more sophisticated forms of pricing involves real-time, dynamic pricing, in which in-home devices communicate up-to-date prices to consumers (and, potentially, smart appliances), who can then shift their behavior to best match low-cost power.
Time-varying rates won’t work without consumer outreach and education, and without thoughtful design decisions that safeguard low-income consumers and the elderly and chronically-ill—all of whom might be disproportionately impacted by changes in the rate structure.
But with a careful, considered approach, this type of innovation could save everyone money, including consumers, utilities, and local governments. It could also carry tremendous environmental advantages: by charging for the true costs of power, utilities can rely less on fossil fuel power plants and better align consumer demand with power generation from wind and solar.
Learn more by downloading the issue brief >