Understanding how time-of-use rates work with solar panels

If you’re one of those people who never pays attention to their utility bill, you might assume that there’s just one price you pay for electricity.

Electricity is priced by the kilowatt-hour (kWh), and if you didn’t know, one kWh is equal to using 1,000 watts (a kilowatt) of electricity for one hour. If you left your hair dryer running on high for 32 minutes, you’d use about one kWh.

Many people pay fixed rates for electricity, but variable rates that depend on the time of day are also common. These variable rates are now required if you’re going solar in California, and either manadatory or optional with some utility companies in other states.

These variable (time-of-use) rates are intended to encourage customers to shift their electricity use to different times of day. They can save the customer money - or potentially cost them more, depending on what time of day they use electricity - but they can also affect where on your roof you decide to place your solar panels. This article will go into these issues in depth, but first let’s start with a little background info.

Why do utility companies offer time-of-use rates?

A time-of-use (TOU) rate means that the price you pay for electricity depends on the time of day the electricity is consumed.

The average American pays around $0.18 per kWh, although this varies a lot across the country. If you pay a fixed price for electricity, it doesn’t matter when you turn on your coffeepot or air conditioner - you always pay the same for electricity. This makes it easier to think about your costs, but a fixed price doesn’t reflect the true cost of electricity.

This is because the demand on the electric grid isn’t constant. When people wake up, go to work, turn on the air conditioning, come home to make dinner and turn on the TV, then turn off the lights and go to bed, the collective effect of everybody doing these same things at the same time is reflected in demand on the electric grid. It looks exactly like this:

Example of daily electricity demand during one day. Credit: CAISO

This is a snapshot of one day of real electricity demand on the California grid. You can see a real-time dashboard of this on their website, and other regions in the United States served by different grid operators have similar websites as well.

When electricity demand goes up, electric grid operators react by asking power plants to generate more electricity. Quite often, the power plants that respond to increased demand are fueled by natural gas because they have the ability to ramp up production in a matter of minutes. Coal-fired and nuclear power plants can’t respond in minutes, and renewables (with the exception of hydro power) don’t have that capability either, unless they’re backed with grid-scale batteries.

If demand goes very high, it can test the limits of power plants to supply enough electricity. When this happens, the wholesale price of electricity goes up. Worst case: there’s not enough power available, and blackouts happen.

All this can get very expensive for utility companies. Instead of building more power plants, utilities can try to manage the public demand for electricity. Not only is this cheaper, but also better for the environment. Time-of-use rates are one method of managing demand.

How do time-of-use rates work?

In the simplest cases, your utility will offer two rates: off-peak during hours of low demand, and on-peak when demand is usually highest. These hours may change between weekend and weekdays, and sometimes seasonally as well - meaning that there may be a summer schedule that’s different from winter.

This is because air conditioning is a big reason for high demand in the summer. But the electric grid can become strained during during bitter cold snaps in winter too, as furnaces and heat pumps crank up to keep homes and businesses warm.

Your utility company may have other rates too. They may offer a mid-peak rate for times of average use, or even a super-peak rate for times when demand for electricity is traditionally very high. Super-peak will typically be scheduled for the late afternoon and early evening in the hottest months of summer.

How do I know if I’m on a TOU rate?

Every electric bill looks different, but no matter which utility company you’re with, your electric rate class will be listed on your bill. Here’s an example from PG&E:

(By the way, this is also an example of a bill for a net metering customer - that is, a solar homeowner who earns bill credits for the electricity they send into the grid.)

Every electric bill will list the rate class you are on, so look over your bill to find out your billing situation. Sometimes the rate class is explained in a separate insert with your bill. You can also check the utility company website.

Examples of TOU rates

To add even more complexity, utility companies sometimes let customers choose from different TOU plans. For example, Southern California Edision (SCE) has three different TOU rate classes that you can choose from.

The above rates are for the summer season, but SCE also has a winter rate schedule from October to May with generally lower prices. This is because electricity demand in southern California is highest in the summer. If you live in a cold climate, your utility might not have a separate winter rate, or possibly charge higher rates in winter.

Confusing? It certainly can be. Bottom line: check with your utility company if you want to find out their current TOU rates.

Would you be better off with a TOU instead of a fixed rate?

Now that you know what a time-of-use rate is, the question is: should you opt into one?

If your utility offers a TOU rate, opting in is usually an easy thing that you can do when you log into your account online.

To make that decision, you need to know something about your household electricity use, which boils down to the electricity use that you have control over. Some appliances in your home run in the background and homeowners rarely, if ever, intervene in their operation. This includes things like refrigerators, sump pumps, and water heaters.

Other appliances, such as clothes washers and dryers, air conditioning, stoves, televisions, and dishwashers are user-controlled, which means that you can make a choice about when you use them.

Time-shifting your energy use

For a lot of your home electricity consumption, its either not practical to change your time-of-use to take advantage of lower electricity rates, or the electricity usage is so small that it’s probably not worth the hassle.

For example, a 40 inch LED television uses somewhere in the neighborhood of 80 watts. Let’s say your utility company is SCE. If you time shift one hour of television watching from weekday on-peak to off-peak, you would save about 1.9 cents. Does saving two cents make staying up one hour later worth it?

Similarly, if you have an electric stove, it doesn’t really make sense to change your dinner time to save on electricity, even though an electric stove uses thousands of watts of power. (However, it can make sense to change your meal preparation habits by using more energy efficient cooking appliances like an instant-pot cookerl, or doing less energy intensive cooking in the hottest months of the year, like making a salad for dinner.)

On the other hand, a central air conditioner might use between 3,000 and 5,000 watts. For many homes in warm climates, that’s their biggest electricity hog. For those homes, time-shifting your air conditioning is a really good idea. You can accomplish this with a smart thermostat and programming it to pre-cool your house to colder than usual during off-peak hours then letting your house “coast” on the cold air through on-peak hours. In fact, many utility companies offer energy demand management programs and will pay you to let them do exactly this by granting them limited ability to remotely control your smart thermostat.

Some other appliances, such as dishwashers, clothes dryers and washers have delayed start functions that make it easier to avoid on-peak electricity usage.

Plugin electric vehicles

If you have a plugin hybrid or fully electric vehicle, it’s almost certainly worth it to opt into a TOU rate class that lets you charge your vehicle in the late evening and early morning. For example, a base model Tesla has a 60 kWh battery. Fully charging that from empty takes more electricity than many homes use in one day.

Electric vehicles usually allow you to program the charging time, so you can plug in your car as soon as you get home but have the car only start drawing electricity once off-peak hours start.

This is a good idea whether or not you have a TOU plan. Because EVs are projected to be the majority of vehicle sales by 2040, the electric grid will need to adapt in order to handle this new and significant load on the system. Electricity is generally cleaner in the middle of the night, so you’ll be helping the environment too.

Do homeowners need to be a TOU rate?

In 2016, California adopted a new rule that requires solar homeowners to have a time-of-use plan. The rule applies only to the state’s investor-owned utilities: PG&E, SCE, and SDG&E. With all three utilities, the rate plans are fairly similar: electricity is generally more expensive in the summer and on weekdays than in winter or weekends, and peak hours are from about 4pm to 9pm.

This new rule is called Net Metering 2.0, and it differs from traditional net metering because the credit you receive for electricity follows the TOU rate schedule.

Let’s say you’re an SCE customer with solar panels. The summer off-peak rate is $0.23 per kWh, while on-peak is $0.37 per kWh. If you send one kWh of excess electricity into the grid at noon, that falls under off-peak hours, so you will receive a $0.23 credit. Later in the day, if your solar panels aren’t generating enough electricity and you need to use one kWh of grid electricity at 5 pm, you’ll be charged $0.37.

While this is still net metering because you always get full credit for your excess electricity, the TOU schedule means that not every kWh of electricity is worth the same.

All of this is coordinated in California by CPUC, and you can read their Energy Upgrade California website to better understand the rationale for the switch to NEM 2.0, and for TOU rates in general.

While the old net metering program in California gave equal credit no matter when you sent solar electricity into the grid, this change does make sense. Renewable energy is a fantastic thing, but one downside is that it does add complexity to electricity grid management. Changes like NEM 2.0 are a good idea because they will allow more renewable energy to be added to the grid with less reliance on expensive infrastructure upgrades.

How does TOU affect the design of my home solar system?

Under a time-of-use plan with peak hours that start in the early evening, it might make sense to face your solar panels west instead of south.

In the northern hemisphere, solar panels will generate the most electricity with an unobstructed view south, because the sun spends most of its time in the southern part of the sky. Because of this, solar homeowners will generate the most electricity if their panels face south.

However, a time-of-use plan changes this calculation. If you have a TOU plan, you will still generate the most electricity if your panels face south, but the value of that electricity may be greater if you face your panels west.

This is because the sun sets in the west, and most utilities schedule peak hours for the early evening. In this situation, pointing your panels west may reduce your total electricity generation, but the total value of the electricity you generate might be higher because you’ll be generating more electricity during hours when the cost of electricity is higher.

If you have net metering (like in California under Net Metering 2.0), if you generate more electricity than you need during those early evening peak hours, it means that you’ll get credited at the higher on-peak rate.

How do I know for sure if I should face my panels west?

First of all, learn about net metering if you haven’t already, and check with your utility company to find out what they offer.

You can use The Solar Nerd calculator to quickly compare the difference in power generation between facing your panels south versus west, but the calculator doesn’t yet allow you to plug in your on-peak and off-peak rates to get a definite cost analysis between the two (that feature is coming soon!).

The best way to get an accurate answer is to work with a professional solar installer. You will need to share your electric bill history for one year, and look to see what time of day that your home uses electricity.

Because power generation is heavily impacted by shading, you need a professional installer to produce a detailed technical analysis to find out if nearby trees or structures will throw shadows that will negatively impact your solar power production. Even seemingly minor shadows, like one from your own chimney, can affect the design of your system.