What Are Time of Use (TOU) Rates and How Do They Work

Electricity has become a staple in our everyday lives. Our homes, businesses and cities depend on energy to keep the lights on and utility companies face the challenge of meeting daily and seasonal demands. These peak times put a lot of stress on the grid and force utilities to use natural gas or fossil fuels to meet the increasing demand, which contributes to climate change. 


Utilities are adapting to the increasing energy need and have introduced innovative rate structures for residential energy customers. From time-of-use rates to real-time pricing, these rate structures all have a common goal: incentivize customers to consume electricity when the cost of generating it is cheap and disincentivize that consumption when the cost is high. To help you understand these rates and reduce your monthly costs, here are a few things you need to know about time-of-use rates.


How do time-of-use (TOU) rates work?

Time-of-use rates are time-based rates where customers are charged based on how much power they use from the utility and more importantly, when they use that energy since the rate you pay for electricity is adjusted over the course of the day. The times of day that are considered “peak” and “off-peak” hours vary from season to season and utility to utility as well as between holidays and weekends. The electricity you use to power your home during these peak times is billed at a higher rate while electricity used during off-peak times is billed at a lower rate, depending on the utility. 


Why do we need time-of-use rates?

Time-of-use rates were designed to better align the electricity costs consumers see with the actual cost of producing that electricity. Today, most utilities update their residential electricity rates, which are expressed in dollars or cents per kilowatt-hour ($/kWh), one to two times per year. This is done to cover the full cost of generating electricity for consumer use and without this time-varying electricity rate, you aren’t able to know how the cost of electricity rises and falls every day.


This is why time-of-use rates can help with transparency: when the electricity rate is adjusted each day, week or month, you get a better understanding of the actual cost of the electricity your home uses. Knowing when these rates will be higher and lower, you then have the power to lower your electric bill by adjusting how much electricity you use and when. 


Time-of-use bills versus standard electric bills

Standard electricity bills are easy to calculate: just multiply the rate you pay for electricity by the amount of electricity you used that month and you’ll get your monthly bill total. 


Time-of-use bills are more complex to calculate but follow a pretty similar process. Instead of multiplying your rate by the amount of electricity you use, you’ll multiply the amount of electricity you consume during certain hours of the day by the rate specified for those hours. Ideally, this means you could see immediate savings on your monthly electricity bills without changing your consumption or behavior, while others may see increased bills if they don’t adjust their electricity consumption habits.


How to make the most of time-of-use rates.

The simplest and easiest way to make the most of these rates is to use your home appliances during the least-expensive hours of the day. Even if you shift your consumption habits slightly, your changes could produce visible savings.


Another way to avoid paying higher prices for electricity during peak times is to invest in a solar energy system and home battery. Most time-of-use rates are highest during the middle of the day when your electricity consumption could be offset by the energy your solar panels produce. To continue with those savings into the evening and on cloudy days, your home battery storage system will store any excess energy your solar panels produce to use when the sun goes down instead of relying on the grid.


If you’re ready to explore your solar + home battery options, give us a call at (818) 751-2323 or get a free quote here