time-of-use rates

Time-of-use (TOU) rates are tiered electricity pricing schedules where the cost per kilowatt-hour changes according to the time of day and season. Rather than charging a flat rate year-round, utilities implement higher rates during peak demand periods, typically weekday afternoons and early evenings, and lower rates during off-peak hours such as late night or early morning. Summer and winter periods often carry different rate structures because heating and cooling loads shift seasonally.

A typical TOU schedule divides the day into two to four periods. Off-peak rates might apply from 9 p.m. to 7 a.m., charging perhaps 8 to 12 cents per kilowatt-hour, while peak rates during 2 p.m. to 8 p.m. weekdays could reach 25 to 40 cents per kilowatt-hour or higher. Some utilities add a shoulder period at intermediate rates. Industrial customers often see more granular schedules with five or more time windows and demand charges layered on top of energy charges. Weekend and holiday rates typically follow off-peak pricing.

Why utilities use TOU pricing

TOU rates align customer consumption with grid capacity and generation costs. Peak periods correspond to when utilities must activate expensive peaking plants, often natural gas turbines, to meet demand. Off-peak periods coincide with baseload generation from cheaper, continuously-running plants. By incentivizing consumption shift, utilities reduce strain on equipment, defer capital expenditure on generation and transmission infrastructure, and lower overall costs. TOU rates also reduce the need to run inefficient peaking generation when demand could be met from existing capacity.

For industrial and commercial customers, TOU pricing creates strong motivation to shift flexible loads away from peak windows. Manufacturing facilities may pre-cool spaces or run thermal storage systems during off-peak hours, then reduce on-site generation during peaks. Data centers schedule batch processing and backups for night hours. This practice is called load shifting. Residential customers see smaller incentives but may benefit by running dishwashers, laundry, or pool pumps during off-peak windows.

The rise of variable renewable generation, particularly solar, has reshaped TOU structures in some regions. Evening peak demand now often extends later as solar output drops after sunset, pushing the peak window to 5 p.m. to 9 p.m. instead of traditional afternoon peaks. Customers with rooftop solar and battery storage can arbitrage TOU rates by storing off-peak solar generation and discharging during peak windows, though this requires metering infrastructure and control systems to track and optimize consumption in real time.