In 2016, California achieved a monumental first: it became the first state in the US to implement statewide time-of-use energy pricing. That may not sound like a sweeping accomplishment—but rest assured, the Golden State’s rate redesign is set to usher in a new era of energy pricing.

Time-of-use rates (TOU, to those in the energy biz) is a multi-tiered payment structure where energy is billed according to the average demand during the time of its use. For instance, you might pay more for a kilowatt hour of electricity during the middle of the day than you would in the dead of night, when most people are asleep. The idea is not to encourage night owls—rather, it’s to help save energy during those periods when most people want to use it. The high prices might make you think twice about turning the AC down to 60 degrees.

Why is that so good for solar-producing households? In warmer climates with higher cooling demands, peak use periods just happen to coincide with the most solar-productive parts of the day. Likewise, if utilities decide to offer net metering—and pay participating customers at tiered prices—there’s a pretty significant payoff for solar households that return energy off the grid. And TOU rates encourage residents to investigate solar storage options like home batteries—so they can save their free energy for the most expensive parts of the day. Sound intriguing? We think so! Here’s what you need to know about time-of-use, and what it will mean for your new solar panels and your home energy prices.

Transmission tower using solar

Table of Contents

Flat Rate, Tiered Structures, and Time of Use: Three Ways of Looking at Energy Prices

Many utilities currently bill energy using flat rates, meaning that they charge the exact same amount regardless of when that energy was drawn off the grid—and how much demand there was at that time. The problem is, sometimes there’s not enough energy to go around—that’s why you’ll have brownouts or blackouts occasionally on a particularly hot day. And there’s little incentive for energy consumers to monitor their use. Sure, running the AC all day may cost you a few extra bucks every month, but it’s worth it not to come home to a hot, muggy home, right? That’s how a lot of people think when they’re not encouraged to conserve.

Tiered structures attempt to correct that behavior by setting forth higher payment levels—the “tiers”—for those users that suck down high amounts of energy. So they basically reward you when you conserve energy, like for instance, if you have your own solar energy system. Time of use takes that one step further, getting closer to charging people what they actually cost utilities. That may not seem all that appealing, but it definitely rewards you if you’re generating your own energy from solar equipment. And demand pricing is a pretty familiar structure for many industries. Think about Uber surge charges, for instance. Annoying though they may be, they reward drivers for getting out when business is booming. TOU pricing is just like that, except it pays off when you use less energy.

There is a fourth pricing structure, real time pricing, in which users get charged real rates (rather than predicted prices) based on the demand at the exact moment when the energy is withdrawn. But tracking these prices is complicated—and the prices are often so volatile that it can be hard to accurately forecast what you’ll spend on your bills from month to month.

Kilowatt hour energy meter

The Bottom Line: Should I Switch to Time of Use Pricing?

The answer to this question—like everything that has to do with utilities—isn’t as simple as it seems. For one thing, you may not even be offered time-of-use pricing in your area. In most states, there’s no government mandate that energy providers have to offer alternative price structures—so you could be stuck with whatever you local utility decides is right. However, some utilities have taken it upon themselves to set up TOU pricing, so it really just depends on your provider. You should check with your local energy company to get more information on the different pricing structures available to you.

Time of use pricing benefits homeowners with solar energy systems—but you’ll really rake in the savings if you have a battery or generator in your home, like the Tesla Powerwall, for instance—somewhere you can hold some of the extra electricity you make. Of course, that means you won’t be making use of net metering credits for those kilowatts, either, so if your utility has a pretty generous sellback system, you may not be as interested in solar storage.

Similarly, time of use pricing really benefits electric vehicle drivers who own their own charging station, since you can choose to charge your vehicle at night, when there’s less drain on the grid. If California’s changes are any predictor, savvy energy planning may just be the way of the future!