The basic idea
On a standard flat-rate plan, every kilowatt-hour costs the same no matter when you use it. A time-of-use plan splits the day, and sometimes the year, into periods with different prices. Energy used in a high-demand period costs more per kWh, and energy used in a quiet period costs less.
The reasoning is that supplying electricity costs more at some times than others. When many people use power at once, the system leans on more expensive generation and busier networks. When demand is low, it is cheaper to serve. A time-based price tries to pass that signal on to customers so they have a reason to shift some use to cheaper times. The pattern of rising and falling demand is explored in the article on electricity demand through the day.
Typical structure
The details vary by utility and region, but common features include:
- Peak period. A few hours of high price, often in the late afternoon and evening on weekdays, when households and businesses are busy. In hot climates it may follow afternoon air-conditioning use. In cold climates it may include morning and evening heating periods.
- Off-peak period. Lower prices, usually overnight and sometimes on weekends and holidays.
- Shoulder or mid-peak periods. Intermediate prices between the two.
- Seasonal differences. Summer and winter schedules may differ, since demand patterns change.
- Critical peak pricing. Some plans add occasional event days with a much higher price when the system is under strain, with advance notice to customers.
You will usually need a meter that records usage by time period. Smart meters make this routine, as the article on smart grids and smart meters explains. Older meters may need replacing or an additional register.
How the bill changes
Your bill will show usage split by period, each multiplied by its own rate. A simple, invented example:
- Peak rate: 30 cents per kWh
- Off-peak rate: 12 cents per kWh
- Flat-rate plan for comparison: 20 cents per kWh
Take a household using 500 kWh in a month. If 150 kWh falls in the peak period and 350 kWh off-peak, the time-of-use energy charge is 150 x 0.30 = $45.00 plus 350 x 0.12 = $42.00, for $87.00. The flat plan gives 500 x 0.20 = $100.00. In this case the time-of-use plan is cheaper by $13.00.
Now suppose the same household used 300 kWh at peak and 200 kWh off-peak. The time-of-use charge is 300 x 0.30 = $90.00 plus 200 x 0.12 = $24.00, for $114.00, which is $14.00 more than the flat plan. The same total usage, in a different pattern, flips the result.
The break-even in this example is where the two cost the same. If P is the peak kWh out of 500, then 0.30P + 0.12(500 - P) = 100, which simplifies to 0.18P + 60 = 100, so P is about 222 kWh, or roughly 44 percent of the total. Below that share of peak use, the time-of-use plan costs less in this example. Real plans also have fixed charges and other details that move the break-even.
Who tends to benefit
Time-of-use plans tend to suit households with flexible use that can move to cheaper periods. Examples might include:
- People who can run dishwashers, washing machines and dryers off-peak.
- Households that charge electric vehicles overnight, as covered in the article on electric vehicles and the grid.
- Homes with batteries or thermal storage that charge when prices are low and supply the home when they are high. See the explainer on energy storage.
- Households that are away or at work during the evening peak.
- Homes with water heating or other loads that can be timed.
They tend to suit others less well, including:
- Households with high use in the evening, such as families with young children, people working from home or people who are home during the day in winter.
- People whose use is hard to move, such as those who rely on medical equipment or who need heating or cooling at particular times.
- People who would find it stressful to watch the clock.
Risks and trade-offs
- Complexity. Several rates and schedules are harder to understand than a single rate. It takes some effort to know when each period applies.
- Uneven effects. Savings are not guaranteed. A household that cannot move its use may pay more than on a flat plan.
- Fairness concerns. Households with fewer options for shifting use, including some vulnerable households, may be affected more. Some regulators address this with protections or optional participation.
- Changing schedules. Utilities can change the periods or the rates over time, particularly as the pattern of demand shifts with more solar generation and electric heating.
- Convenience costs. Running appliances late at night can be inconvenient, and safety matters: do not leave appliances unattended or run equipment in a way the manufacturer does not recommend simply to save money.
Variations
Some plans use rates that follow wholesale electricity prices closely, changing hourly or every half hour. They are sometimes called dynamic or real-time plans. They offer more potential savings during cheap periods and carry more risk when prices spike. They differ from fixed-schedule time-of-use plans, where the periods are set in advance. The general trade-off between predictability and exposure is similar to that in fixed vs variable plans.
Making a decision
If you are considering a time-of-use plan, many utilities offer a comparison tool or a trial period. A realistic way to approach it is to find out when your household actually uses energy, using past bills, an app or smart meter data. Then estimate the charge under each plan with your own pattern, not an ideal one. Ask what happens if the plan does not work out and whether you can go back to a flat rate.
This is general information, not financial advice. Offers and rules vary by location and supplier.