Time-of-Use Pricing, and Why It’s Going to Raise Your Electricity Bill

Going back decades, energy bills have been incredibly simple to calculate. Take the amount of electricity you use, multiply that by the current price per kilowatt-hour (kWH), tack on some miscellaneous fees and taxes, and that’s it.

But in recent years, energy companies like PG&E have been pushing to change how we pay for electricity. The reality is that it costs more to produce electricity when it’s most in demand, versus during periods of low demand. When the majority of Americans get home from work between 5 and 6 pm and turn on the lights and HVAC system, and cue up Netflix while putting dinner in the oven, energy demand increases. This increased demand causes an even more significant increase in energy costs.

And this is a trend that’s becoming increasingly evident in California. Last year, the U.S. Energy Information Administration published an article highlighting how electricity prices in California have been increasing year-over-year during daily high demand periods.

In 2016, the price of electricity at 8 PM was $35 per megawatt-hour. Just a year later, it was nearly $60. This is in part because California energy companies like PG&E are relying increasingly heavily on renewable sources of energy, such as solar power farms. During low demand periods when there isn’t much need for auxiliary sources of energy, this significantly decreases the cost of producing electricity, as evidenced by the decrease in low demand period prices in the graph above.

But the problem is that due to the way the energy market has changed, it’s much more costly for energy utilities to fire up additional power plants when they are needed, causing prices to skyrocket in the morning and evening. But for homeowners and businesses paying a standard fixed price for their electricity, there is no means for electricity providers to recoup the costs for providing electrical service during these periods of peak demand, aside from increasing the overall price of electricity.

Which is why PG&E, SMUD, and other major California energy utilities are in the process of shifting over to a new pricing system, called “time-of-use.”

Time-of-use pricing is exactly what it sounds like—the cost of your electrical usage depends on when you use electricity in your home or business.

Time-of-use (TOU) pricing breaks up the day into multiple blocks, with the cost of electricity varying from block to block, depending on typical demand during that timeframe. For instance, as of April 2018, PG&E’s time-of-use rate plan is scheduled accordingly (there are multiple TOU plans, but we’ll use E-TOU-A for the sake of simplicity):

• Mon-Fri, 12 AM to 3 PM and 8 PM to 12 AM: Off-Peak Pricing
• Mon-Fri, 3 PM to 8 PM: Peak Pricing
• Sat-Sun, All Day: Off-Peak Pricing

While this is seemingly simple, there is an additional wrinkle. Between June and September, the off-peak rate is $0.32 and the on-peak rate is $0.40. From October to May, the off-peak rate is $0.27 and the on-peak rate is $0.28. Thus, the price PG&E customers pay varies not only depending on the time of day, but also the time of year.

Many energy consumers are unprepared for the sky-high bills they will face with time-of-use pricing.

The truly striking thing about TOU pricing is how expensive it is across the board, versus flat-rate pricing. For comparison, PG&E customers on the traditional flat-rate plan, the baseline price per kWh is currently $0.21, a full 6 cents less than the lowest off-peak TOU rate, and 11 cents less than the summertime on-peak rate.

As time-of-use becomes the standard (as will be the case with PG&E by 2020), consumers will not only be transitioned to a more dynamic pricing system, but an overall more expensive one.

For example, let’s consider a homeowner who lives just outside of Sacramento, and whose house is powered by PG&E. In the month of May, historically they have used about 1,000 kWh, on average. Assuming they don’t get hit with any surcharges for excessive use on any particular day, their energy bill for May 2018 would be $212, excluding fixed costs and other fees.

But this year, PG&E switches them from their old rate plan to time-of-use. Like most people, the homeowner works during the day and is home in the evenings, and their behavior varies during the weekends. Consequently, in May they use 70% of their energy, or 700 kWh, during on-peak hours (weekdays 3-8 PM), and the remaining 30% (300 kWh) during off-peak hours.

With PG&E’s current TOU pricing, their energy bill this May would be $377, a 78% increase over what they would have paid under PG&E’s old pricing system. This should give you a hint as to financial pinch that California residents are going to feel when the switchover to time-of-use pricing is complete.

And that hit to the pocketbook is only going to get worse. Another important but overlooked consideration for homeowners is how the gap between on-peak and off-peak pricing has been growing over the last decade. While the residential TOU rate plans PG&E is putting into effect have only existed for a couple of years, examination of PG&E’s commercial TOU rates reveals a widening gap between on-peak and off-peak costs. In mid-2013, the difference between summer on- and off-peak pricing for commercial A-1 was 3 cents. Mid-2014, it was 3.5 cents. Now, the gap is more than 5 cents.

The trend is quite clear. As time goes on, it’s highly likely that the gap between off- and on-peak pricing will continue to grow. Power will be exorbitantly expensive when you need it most: when you get home from work and flip on the air conditioning, your children turn on the television, you switch on the oven to cook dinner, and you turn on the lights as the sun goes down.

Residents of California, and indeed the United States as a whole, are going to have to drastically change their lifestyles to accommodate this unpleasant reality. How you live and work in your home will have to change to reduce your energy footprint, or you will have to simply eat the higher bill, provided you can afford it.

But there’s another option: residential solar electricity systems.

An increasing number of California residents have been installing rooftop solar energy systems as a way to significantly reduce their dependence on their local energy utilities. With the way that energy prices are soaring, the time to break even on the up-front cost of buying a system has been dropping rapidly.

Currently, we estimate that the typical homeowner will save enough money on their energy bills to offset the total cost of a solar energy system in about 5 to 7 years, depending on usage and local energy rates. As utility prices continue to rise, this figure will drop. This is why we strongly recommend that homeowners consider the installation of a solar energy system as soon as possible. We might estimate that, according to your current usage and energy prices, that you’ll break even in 7 years. But next year, energy prices might skyrocket, and you’ll be spared the financial pain your neighbors suffer every time their PG&E or SMUD bill shows up in the mail.

In addition, we anticipate home battery storage solutions to become a significant means of improving the flexibility and efficiency of newly and previously installed systems, further improving the savings realized by homeowners.

To learn more about time-of-use pricing, and how a solar power system can help your pocketbook, contact Capital City Solar today by calling 916-782-3333, or by sending us a message using our contact form.