Time-Based Rate Programs

Many of the Smart Grid Investment Grant (SGIG) projects that invest in smart meters also choose to introduce various forms of time-based rate programs to their customers. These programs range from time-of-use to real-time pricing and are frequently referred to with terms such as time-differentiated retail rates, time-variant pricing, advanced pricing programs, and time-varying retail pricing. We refer to all of these as time-based rate programs—in which prices vary over time and different prices are in effect for different hours on different days.

Because electric power companies are generally monopoly utilities, regulatory agencies approve prices for electricity to consumers. These prices are referred to as electricity rates or tariffs. Sometimes a distinction is made between prices or rates on the one hand and tariffs on the other. In these instances, a tariff is an approved collection of different rates that utilities offer to specific but different types of customers (e.g., real-time pricing for large commercial and industrial customers vs. flat-rate for low-income residential customers).

Electricity tariffs can be affected by the granularity, or precision, of electricity usage data that is recorded by the customer’s meter. Mass-market customers (i.e., residential and small commercial) overwhelmingly have bulk usage meters with a single data register, which simply accumulates the usage over time. As such, these customers can only be billed for the electricity they use according to the following types of pricing:

  • Flat Rates - all usage during a given period of time (e.g., 30-day billing cycle) is charged the same rate; or
  • Tiered Rates - typically charge a different price based on blocks of usage (e.g., first 500 kWh vs. next 500 kWh) during a given period of time (e.g., 30-day billing cycle).

Such electricity rate designs do not convey the variability over time (e.g., hour-to-hour, day-to-day, season-to-season) in the cost to produce electricity.

Using smart meters, utilities are now capable of recording electricity usage on a much more frequent basis (e.g., every 15 minutes), enabling mass market customers, who previously had bulk usage meters, to be introduced to new types of pricing programs that better reflect these differences over time in the cost to produce electricity.

Forms of time-based rate programs include:

  • Time-of-use pricing (TOU) - typically applies to usage over broad blocks of hours (e.g., on-peak=6 hours for summer weekday afternoon; off-peak= all other hours in the summer months) where the price for each period is predetermined and constant.
  • Real-time pricing (RTP) - pricing rates generally apply to usage on an hourly basis.
  • Variable Peak Pricing (VPP) - a hybrid of time-of-use and real-time pricing where the different periods for pricing are defined in advance (e.g., on-peak=6 hours for summer weekday afternoon; off-peak= all other hours in the summer months), but the price established for the on-peak period varies by utility and market conditions.
  • Critical peak pricing (CPP) - when utilities observe or anticipate high wholesale market prices or power system emergency conditions, they may call critical events during a specified time period (e.g., 3 p.m.—6 p.m. on a hot summer weekday), the price for electricity during these time periods is substantially raised. Two variants of this type of rate design exist: one where the time and duration of the price increase are predetermined when events are called and another where the time and duration of the price increase may vary based on the electric grid’s need to have loads reduced;
  • Critical peak rebates (CPR) - when utilities observe or anticipate high wholesale market prices or power system emergency conditions, they may call critical events during pre-specified time periods (e.g., 3 p.m.—6 p.m. summer weekday afternoons), the price for electricity during these time periods remains the same but the customer is refunded at a single, predetermined value for any reduction in consumption relative to what the utility deemed the customer was expected to consume.

All of the pricing programs listed above, except for TOU, are also commonly referred to as dynamic pricing because prices are not known with certainty ahead of time. TOU tariffs are not a type of dynamic pricing because the rate schedule is predetermined and static. Dynamic pricing programs allow customers and utilities to take greater advantage of grid and wholesale market variability and of the capabilities of smart grid customer systems. All of these forms of time-based rate programs are enabled by the investment and installation of smart meters. Currently, most of the SGIG projects that include time-based rate programs are relatively small-scale pilot programs, although several projects with smart meters and time-of-use rates involve system-wide implementation.

The table below explains the typology used for the SGIG time-based rate program categories.

Base Rates Product Overlays SGIG Time-Based Rate Program Categories
Flat -- None
Flat Critical Peak Pricing Critical Peak Pricing
Flat Critical Peak Rebates Critical Peak Rebates
Tiered -- None
Tiered Critical Peak Pricing Critical Peak Pricing
Tiered Critical Peak Rebates Critical Peak Rebates
Time-of-Use -- None
Time-of-Use Critical Peak Pricing Critical Peak Pricing
Time-of-Use Critical Peak Rebates Critical Peak Rebates
Real Time Pricing -- Real Time Pricing
Real Time Pricing Real Time Pricing Real Time Pricing
Real Time Pricing Critical Peak Rebates Real Time Pricing

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