Time of Use and Dynamic Pricing

Most Americans pay a flat rate for electricity regardless of when they use it: $0.15/kWh at 3 AM or 3 PM. But the cost of producing that electricity varies dramatically by hour, from $0.02/kWh overnight to $0.50/kWh during peak demand. Flat rates hide the true cost signal and eliminate the incentive to shift consumption to cheaper hours.

Time-of-use (TOU) pricing divides the day into 2-3 rate periods. California's default TOU rate charges $0.25/kWh off-peak (midnight-4 PM), $0.40/kWh peak (4-9 PM), and $0.30/kWh mid-peak (other hours). The price difference gives customers a reason to run dishwashers and charge EVs overnight. California found that TOU pricing reduced peak consumption by 4-6% after its opt-out rollout, the nation's largest.

Real-time pricing (RTP) passes wholesale prices directly to consumers, changing every 5-15 minutes. ComEd's RTP program in Illinois has saved participating customers roughly 15% on supply costs on average, but prices occasionally spike to $1+/kWh during extreme events. The bill volatility deters most residential customers.

If dynamic pricing saves money and reduces peaks, why don't all utilities use it?

Equity and politics. Low-income customers often cannot shift consumption (they lack smart thermostats, flexible schedules, or battery storage). Peak prices fall hardest on those who work fixed hours, cook dinner at peak times, and cannot invest in efficiency. Utilities and regulators fear that dynamic pricing redistributes costs from affluent, flexible households to poor, inflexible ones.

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