As advanced metering proliferates across the residential sector, utilities are increasingly turning to time of use rates (TOU) to more accurately price electricity. Rates that send more efficient price signals, the thinking goes, will also allow for customers to adjust their usage and conserve energy while utilities better manage peak conditions.

By 2019, all new residential customers in California will be enrolled by default into a TOU plan. Ontario recently rolled out default TOU to 4 million customers. Italy has, as well. A recent Brattle study  examined 300 TOU pilots and trials. 

But despite findings that time-based rates can help customers reduce peak load—and may help the utility reduce supply costs—several variables must be juggled when designing the proper rate. According to a group of consumer, clean energy and environmental advocates, any changes must be made cautiously and gradually to ensure more vulnerable customers are not left higher bills they can't control.

“TOU rates can have adverse impacts on consumers, especially on those who may have less ability to shift their usage to capture the benefits of TOU pricing, and on those who have trouble budgeting for bills that exhibit greater monthly volatility,” the group warned in a recent paper.

Titled “Guidance for Utilities Commissions on Time of Use Rates,” the paper represents a shared perspective from a range of advocates. Among the authors are representatives from US PIRG, The Utility Reform Network,  National Consumer Law Center,  Acadia Center, and others.

The paper is not an endorsement of TOU rates, though it recognizes that the time-based rates can help achieve some goals. Instead, it reflects an agreed upon set of planning steps and consumer protections, said John Howat, a senior policy analyst at National Consumer Law Center and one of the paper's authors.

“Individuals within the group of authors don't always fully agree on all aspects of the complex issues faced in the transition to cleaner, more just energy systems,” Howat said. “But we do know how to talk with each other and hear broad ranges of perspectives.”

Bringing together those perspectives, he said, can help create a more effective regulatory process, fair rate design and stronger consumer protections. Recommendations include utilities explicitly identifying policy objectives, keeping the rates simple, and ensuring consumer education and access. 

“There was an awful lot of discussion about some of the dangers that could come from implementation
of time of use and other time varying rates, absent good planning and certainly good consumer protections,” said Howat.

What's the objective?

Among the key recommendations to regulators considering approving TOU rates, the group of advocates said utilities need to explicitly identify the system and policy objectives they are seeing from the new rate.

It could be economic efficiency, integration of distributed resources, peak load management or emissions reductions, but the paper points out “there may be alternative solutions to reduce system peaks that do not require installation of new meters or charging higher prices during peak demands.” 

“All means of achieving those objectives need to be put on the table and evaluated before you go ahead and implement a time of use rate,” said Howat.

And even when a new time-varying rate is put in place, consumer protections must remain. That could include access to educational materials, shadow billing to see what their cost would have been, or hold-harmless clauses to ensure they are benefiting. “These are critical consumer protections,” Howat said.

At particular risk are consumers who are more vulnerable to increased bills and unsafe indoor air temperatures. If regulators are going to implement fundamental rate changes, consumers must be well-educated and positioned to adjust.

Some customers will be able to save money with TOU rates, if they are able to move consumption to cheaper periods. But Howat said the consumers most likely to incur penalties are those who can least afford it.

“And we have to bear in mind that not all customers have access … to energy management equipment, energy efficiency resources and smart appliances, or the time and wherewithal to look at and be aware of when expensive periods and when less expensive periods are,” said Howat. “Those are not equally-distributed circumstances and resources. Before implementing any time-varying rate, we need to be aware of that.”

Designing the rate

How the time-varying rate is structured will play a large role in how effective it is. And the emphasis is on keeping it simple.

The report recommends keeping the design to a relative few time periods — typically just two or three — that sync with underlying system costs . The length of the time periods must be chosen deliberately, and the pricing difference between peak and off-peak rates must sent the correct signals.

The duration of usage periods "can be a two edged sword," the authors found. Shorter periods of two to four hours make larger price differentiations easier to implement and more closely tie the rates to utility costs. The shorter periods are also easier for customers to respond to.

"In contrast, long periods, generally greater than 5 or 6 hours, tend to dilute both cost recovery and the attendant price signals and present more difficulties for customers to engage and respond," the group of advocates concluded.. 

And pricing periods should  be designed so that customers can avoid usage in the highest cost periods through either manual or automated modification of their behavior, but without a significant compromise of health, safety, or lifestyle. "The goal for regulators should be to find a balance that is reflective of utility costs and is actionable by the consumers," the report says.

Earlier this year Brattle Group released a study examining how TOU rates were rolled out in Ontario. The conclusions stressed that the differentia between peak and non-peak rates needs to be stark.

“For TOU rates, the magnitude of the impact on peak demand is consistent with the size of the ratio between off-peak and on-peak rates,” Brattle Group Principal Ahmad Faruqui told Utility Dive. A 1-to-1.5 differential would be mild, whereas ratios of 4-to-1 or 5-to-1 in high-demand periods would garner significantly more load shift.

The goal, according to Howat and other researchers, is to adopt price differentials that motivate consumers to shift load, but without excessive bill impacts. One possible solution is for a utility to offer a menu of voluntary TOU rates that possess different times and pricing. 

Opt in/Opt out

One challenge with new rates is pitching them to customers. Some utilities are choosing to try opt-out rates, where the consumer is automatically placed on some kind of time varying rate.

The paper has no consensus on this, though it notes opt-in customers tend to be more responsive to price signals. Howat said he personally favors opt-in rate structures, and prefers to incentives of dynamic pricing to the use of penalties. But he said  while there as no full agreement among authors, “discussions on the topic were productive and informative.”

Opt-in structures have the benefit of protecting customer choice, and that is a particular concern for low- and moderate-income customers who may not have the ability to shift their usage. The potential for higher bills, along with health or safety impacts if prices spike during extreme weather, "has led some consumer groups to oppose the use of default TOU rates."

“Adopting a final position on this issue, in my view, must be done on a case-by-case basis,” Howat said.