What You Need to Know About Dynamic Electricity Pricing

When something's in higher demand, it's going to cost more, right? It's Economics 101. And when something's not in demand, the price typically drops, often significantly. Think bags of deeply discounted candy after Halloween. Or perhaps artificial Christmas trees after everyone’s opened their gifts on Christmas morning.

However, when it comes to your monthly power bill, like most consumers across the country, you likely pay a flat rate for electricity regardless of when it’s consumed. The cost of producing electricity, however, actually changes based on the time of day and the demand from your community.

For example, in the late afternoon and early evening when a majority of the population returns to their homes, the demand for electricity spikes considerably. You're fixing dinner, turning on your favorite Netflix show or maybe throwing your work clothes in the laundry. To make up for this spike in demand, power companies often have to start up “peaker plants”, a type of limited-use power plant that’s typically powered by natural gas or coal.

This process is highly inefficient and costly for the electrical company, so these costs are generally passed on to you through a higher overall rate. That is, if you wash your clothes or run your dishwasher at an off-peak hour, like 10 a.m., you may be overpaying for the electricity you use.

Electric Bill

But many electrical utilities across the country are increasingly offering rate plans that rise and fall with the cost of producing electricity. In some states, like California and Massachusetts, this is actually being mandated by the state legislatures. In other regions, utilities are just catching on to the fact that many consumers prefer these plans. Depending on the state or electrical company, these plans go by many names, but are often grouped into terms like “dynamic pricing plans” or “time-varying rate plans”.

There are also many models that electric companies use for these plans, but the gist is the same: reward customers with lower prices for not using energy at the costliest times of production. Common types of plans include:

Real-time pricing – With real-time pricing, prices vary over short intervals (typically an hour), and you are charged a different price for each interval, reflecting the varying costs of electricity. Sometimes, the hourly prices are based on day-ahead market prices, so that you have time to plan your energy usage based on the prices set on the previous day. With an hourly rate plan, you can easily save money here and there just by shifting energy-intensive tasks, like running a dishwasher, by an hour or two.

Critical peak rebate – With a critical peak rebate plan, the utility will actually pay you, the customer, for the power you are able to reduce during the peak hours of certain “critical event” days relative to the amount you normally use. This plan incentivizes you to reduce your energy usage only during days when the utility expects to see very high usage, like exceptionally hot summer days, and you don’t face a risk of increased bills if you’re is unable to reduce consumption at that particular time.

Time-of-use pricing – A time-of-use pricing plan breaks up the day into larger intervals with different prices that remain fixed over a season. These are often off-peak (generally late at night to early morning), interim prices (reflecting times when demand and costs are moderate) and peak (the aforementioned late afternoon/early evening when most people are returning from work and/or school). This method of pricing encourages you to reduce your use during peak demand times by charging a higher price and shifting use to times of lower demand by offering a lower price for these periods.

All of these programs – and others not mentioned above, like variable peak pricing and critical peak pricing – can result in benefits to you if you're willing to adjust your routine to get the most value from these plans. They do, however, have varying risks associated with them.

With a critical peak rebate program, for example, you won’t be penalized for not reducing your usage during a critical event – you just simply won't receive the rebate on your monthly bill. However, if enrolled in a time-of-use pricing plan and you don't change your early evening routine, it’s possible that you’ll see a higher power bill at the end of the month. These plans give you, the consumer, more control over how much you spend each month.

In addition, a recent, first-of-its-kind study found that for most people the risks associated with real-time pricing plans are negligible or non-existent. This analysis of consumers in Illinois found that 97 percent of electricity customers would actually save money by switching to real-time pricing – without making any changes in their daily tasks or schedules.

For the only three percent that lost money in the study, the average increase in power bills was an estimated total of $6.23 – for the entire year. On the other hand, real-time pricing – again, without any behavior changes – would have trimmed bills for the average customer by nearly $90 annually.

So, are you interested in enrolling in a dynamic pricing plan? If one of the above plans has piqued your interest, you should contact your current electricity provider or visit their website and see what options are available to you. Ask questions about each plan and make sure you understand when prices are the cheapest and when they’re the most expensive. You could end up seeing a lower monthly power bill.

To learn more about time-varying rate plans and how you can be a smarter energy consumer, read this fact sheet. To learn more about other relevant energy topics, like renewables and smart cities, watch our latest series of videos on YouTube.

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