Time-of-use rates are becoming a bigger and bigger topic in Minnesota. Time-of-use rates are designed to reduce peak residential energy use through price incentives. This pricing structure has the potential to both save consumers money and reduce emissions from electricity generation.
Why reduce peak energy use?
On a typical weekday, many of us are away from our homes either at work or at school, meaning significantly less energy is being consumed. However, in the evenings when we are all returning to our abodes, demand for energy goes up, particularly on hot summer days when many people crank up their A/C units.
When demand for energy increases at certain times, this creates what is known as peak energy demand and can put a strain on the system. During these times, energy is more expensive to generate and is typically dirtier because utilities have to call on less efficient “peaker” power plants.
There are many tools available to utilities and customers to limit these peak times (We cover this issue and the importance of energy demand side management and demand response in previous blogs). One such tool are time-of-use rates.
What are time-of-use rates?
Under time-of-use rates, customers pay different rates for energy use depending on the time of the day. Time-of-use rates more closely align prices with the cost of generation, transmission, and distribution of electricity than the set per-kilowatt-hour (kWh) rate currently in place, in which customers pay the same rate for each unit of energy consumed regardless of the time of day.
Many Minnesota utilities currently have time-of-use rates available, but the current design only makes them useful for a certain portion of customers (think electric vehicle owners charging their cars overnight when demand is lowest).
Xcel Energy Pilot
Xcel Energy recently submitted a proposal for a time-of-use rate pilot. Xcel spent several months working with CUB and other stakeholders to design a pilot to test a new time-of-use rate in their service territory, which the Public Utilities Commission recently approved. CUB was happy to support the pilot.
This pilot has a three-tiered rate structure. Participating customers will pay more for electricity during a five-hour peak period from 3 p.m. to 8 p.m. Customers will be rewarded with an off-peak rate during the day that is slightly less than the average rates customers are currently paying as well as an overnight super off-peak rate from midnight to 6 a.m., when customers will pay about half of the regular off-peak rate. Weekends and holidays only include the off-peak and super off-peak rates.
The pilot will be conducted in a portion of Eden Prairie and the Hiawatha neighborhood in Minneapolis beginning in 2020. It is an opt-out pilot, meaning customers can decide to go back to the current pricing structure at any time during the two-year pilot. Xcel Energy will provide some bill protections for customers on the pilot rate, as well.
Time-of-use pricing has many benefits, both for consumers and the environment. First, time-of-use pricing more closely aligns prices with costs. Under the current pricing system, customers who use more energy when overall demand is low pay more than their fair share, and customers who use more electricity during evening hours, when energy is more expensive to produce, pay less than the costs of serving them.
Second, by more closely aligning prices with costs, customers will have greater control over their bills and ability to save money. Those who want to save money can shift their use to off-peak times.
Finally, utilities rely on peaker plants that only run a few hours a year during these peak times while customers are paying for these plants all year. Time-of-use rates should help make electricity cheaper and cleaner overall by limiting the need to build and run these expensive and inefficient power plants.
A typical time-of-use rate design won’t change the total electric bill for an average customer who continues to use electricity when they always have. However, customers can save money by moving some of their electricity usage to off-peak hours: running the dishwasher overnight or doing of the laundry on the weekends, for example. Studies show that customers have excellent opportunities to shift their electricity usage, and thus save money on their own bills and reduce the overall cost of energy needed on the electric grid.
Customers who use more electricity than average at peak times will see their bills increase under time-of-use rates – which better reflects the costs that they impose on the electric system. On the other hand, customers who use less peak energy than average will see bill savings even without making any changes.