Pricing: Tiered vs. Time of Use

Utilities generally allow customers to choose between tiered pricing and time-of-use (TOU) plans. Under tiered pricing, a certain amount of power per month can be purchased at a low cost, another amount can be purchased at a slightly higher cost, and so on. Under TOU plans, a utility may offer summer and winter rates, where a certain price is charged during the daytime (the peak) and another at night. A common analogy is that tiered rates are similar to income tax brackets, and TOU policies are like cell phone plans. Fortunately, solar panels concentrate on offsetting the most expensive parts of both types of plans.

Tiered Pricing

The fundamental idea of tiered pricing is that a certain amount of power can be purchased at the least expensive rate, after which certain amounts are available at escalating prices. This way, customers who use very little electricity pay less per kilowatt hour than do customers who use a lot of electricity. The two bottom tiers are considered the “baseline” electricity usage – the basic level of electricity that any household would need – and are generally protected from rate increases. So, if an electric utility increases its prices, those increases happen in the upper tiers.

Net metering allows the property owner to reduce their electricity bill, starting with the highest priced tiers first. The utility will read the electricity meter once a month and allocate the property’s usage into the tiers. Lower total electricity usage means that less power will be allocated to the most expensive tiers, since the least expensive tier is filled first. The owner of a solar panel will more rarely extend into the top tiers, the thus impact of utility rate increases over the years will be reduced.

Time Of Use
TOU plans are an option designed to reward off-peak electricity use. The utility is willing to charge less at off-peak times because it costs less to generate electricity at those times.

Peak times are generally during the weekdays. This is when businesses are up and running, air conditioning units are at full blast, home appliances are running, and so on. Fortunately, the time when people use electricity the most – during the day – is when the sun is shining and solar panels are generating electricity. Like with the tiered system, solar panels address the most expensive parts of the bill in a TOU plan.

Electricity Rate Changes

Utility rates have risen over the years, and as cheap but dirty technology is being replaced by clean energy, we should expect that they will continue to rise. Government regulation keeps the prices from spiraling out of control, but there is no avoiding the fact that energy is becoming more expensive.

Government regulation ensures that utility rates reflect the actual costs of providing the power. Utility rates are influenced by volatile natural gas prices, carbon emissions regulation, and the costs of developing new power plants and infrastructure.

California has one of the highest average utility rates in the country, and rate increases are currently underway.

Rate changes generally affect the highest price tiers, so a solar panel that protects the property owner from those price levels will reduce the impact of these price increases in the future.

Reading a Utility Bill

Electricity bills can be complicated and confusing to read, but there are a few important numbers that everyone should know. They are: average daily electricity use, delivery charges, and generation charges. These numbers will help you understand how your electricity use is changing over time and will give some insight into how to minimize the electrical bill.

Average Daily Electricity Use
This figure may also be presented as a monthly amount; to convert from monthly to daily, just divide by the number of days in the month. Energy usage will be reported in kilowatt hours, abbreviated “kWh.” A kilowatt is 1,000 watts, so one kilowatt hour is the amount of electricity it takes to run ten 100-watt light bulbs for an hour.

Monthly changes in energy use generally come from different ways of using large home appliances, such as heating or air conditioning, refrigerators, washer/dryers, pool heaters, and so forth. (Note that the electricity bill won’t cover appliances powered by natural gas, such as a gas stove or water heater.) In warm areas like Southern California, we usually see higher electricity bills in the summer when people run their air conditioning units.

Generation Charges
Generation charges represent the cost of the electricity that you were delivered. The kilowatt hours of power will be assigned various prices depending on whether you’re in a TOU or tiered pricing plan. These charges represent the cost of running a generator to produce the electricity that you used. The less total energy you use the lower your generation charge will be.

Distribution Charges
Distribution charges represent the cost of the infrastructure that delivered the energy to your home – from the high voltage transmission lines carrying power away from the generator to the poles and wires that deliver electricity to your property. Distribution charges are usually allotted based on the highest electricity load to your property during the month. So, if one home runs the pool heater at night and the air conditioning during the day, and the next home runs both at the same time, the second will probably get a higher distribution charge.