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Designing Your Own Electric Rates

It’s fashionable these days to talk about how a smart electric grid connected to smart appliances could set new trends for energy efficiency. But will these proposals lead to electricity prices that are lower, or higher?

The answer to that question is that it will be up to the individual consumer. And that’s one of the keys to making a success out of the smart grid of the future.

The smart grid will work like this: Special electric meters and appliances will show customers that electricity has different prices different times of the day. When electricity is very expensive, customers are supposed to want to use less. That will help with efficiency because it means utilities can use their power plants more evenly.

Sounds simple–but to do it on a large scale will require major changes.

The electric rates we all pay are a greatly simplified version of the different expenses electric utilities have from day to day, hour to hour, even minute to minute.

A ton of coal might cost a few dollars more or a few pennies less from one week to another. And the price of fuel isn’t the only expense that utilities have–they have to build power plants and transmission lines, maintain them, repair parts of the system whenever storms cause damage, and pay their employees. That’s a lot of cash going out–and it must be carefully balanced with cash coming in from customers.

One rate fits all
Instead of bothering consumers with all these details every day, utilities set a price of electricity per kilowatt-hour all the time for all consumers, whether it is a Tuesday afternoon or Saturday morning, January or June.

This simple “one rate fits all” approach based on averages works very well.

Over the decades, utilities and government regulators added small bits of fine-tuning to the system. When they recognized that under certain circumstances utility companies’ expenses would vary by unusual amounts, they added things such as surcharges and adjustments. But these are carefully regulated, and appear as single line items on a customer’s bill.

For consumers, this system makes it relatively easy to figure out each month’s bill. The rate per kilowatt-hour stays the same for many months at a time.

This works fine for households.

But for certain large commercial customers, who use more electricity in a single hour than a whole neighborhood of houses uses in an entire day, utilities and regulators came up with a different system. There are many special expenses and challenges involved in providing a very large, steady stream of power to a single location, such as a manufacturing plant. For very large power users, utilities are allowed to charge different rates during each 24-hour period.

This system goes by several names, including “time of day rates” and “tiered pricing.”

Power hours
But when the demand for electricity is very high during certain hours of a particular day or during a particular season of the year, extra power plants must run to meet this high demand for electricity. These “peak” plants may use coal, or another fuel such as natural gas. Running these extra generators means that the utility has higher expenses at these peak times–and regulators allow utilities to charge certain customers a higher price for the electricity used during these peak power hours.

What if consumers could see–beforehand–that using electricity during certain hours would add a lot to their monthly bill? Would consumers be willing to change their behavior and use electricity at a different time when it’s cheaper?

Different times, different prices
A very small experiment in progress in Kentucky right now is testing an early version of this idea in a few households. Appliance maker General Electric, with a large manufacturing plant in Louisville, is working with an investor-owned utility to see how electricity consumers will behave. In this smart grid test project, a few dozen homes contain smart appliances, smart meters, and other technology that provide information about electricity with higher–and lower–prices than the usual standard rates.

Designing such a new pricing system for electricity for individual consumers is complicated. In this experimental program, now in its second year, there are three main price levels.

The lowest price rate is about one-third lower than the normal price per kilowatt hour for residential customers. During weekdays in the summer months, customers in the experiment pay that rate for the electricity they use from 9 in the evening, through the overnight hours, and until 10 the next morning. On weekends, the lowest price period is even longer–it’s in effect all the time, except for the hours between 1 and 6 in the afternoon.

A second slightly more expensive rate, that is still a bit lower than the normal price per kilowatt-hour, is in effect for certain periods during the late morning and again in early evening, weekdays, with different periods on the weekends.

A third rate that is roughly two-thirds higher than the normal rate goes into effect weekday afternoons from 1 to 6. Using electricity during these hours is a lot more expensive than during the other times. On the weekends the time range for this price is slightly different.

But a fourth price level can go into effect in special situations on any day–and it is a full five times higher than the usual rate. That huge difference is designed to really grab consumers’ attention. In the experiment, participants receive a special notification about half an hour before that super-high price will go into effect so they’ll have time to turn off or pause appliances that won’t be needed during the most expensive electricity period.

This experiment is scheduled to run for at least another year. In working with the state Public Service Commission, the utility company tried to devise a system of prices that are “revenue neutral.” That means that the total monthly bill for customers who shift some of their electricity use to blocks of time with different electricity prices will be about the same as the monthly bill for customers who stay on the old “one rate fits all” system. But if such a system went into effect for everyone, consumers who did not change their behavior could end up with higher bills.

There are additional expenses involved in such a smart grid program with variable electricity prices. Consumers would have to buy add-on devices that interact with electricity price information for existing appliances, or buy new appliances with these added features built-in. Utilities would also have to spend extra money to replace existing electric meters with new ones that can perform more complicated tasks. Utilities would also have to change a lot of their daily procedures, including many computer systems to manage so much new information.

If this test program shows that consumers really will change their electricity use to avoid very expensive price periods and shift to lower price times, then such designer price systems may become more widespread.

But before that happens, state lawmakers will have to carefully examine the entire utility regulatory structure to make sure that consumers still get exactly what they’re paying for–safe, reliable, affordable electricity all year long.


This column is the third in an occasional series about the “smart grid”–what it is and how it will work. The smart grid is in the news a lot these days because it promises greater efficiency, which could hold down costs and environmental effects. The smart grid is basically a plan to use the Internet to connect homes and businesses to the nationwide grid of electric power lines. The idea is that Internet connection would allow those homes and businesses to better manage the flow of electricity so that transmission lines and power plants aren’t overused during one time of day, then underused at another. Electric rates would be higher, for example, during the heat of the afternoon when everyone is using their air conditioner, and lower in the middle of the night when the utility system has extra capacity. Movie theaters use this same idea when they charge top price for tickets on Friday and Saturday nights, then offer reduced rates during afternoons when most of the seats sit empty.

You can read the other smart grid columns in The Future of Electricity by typing “smart grid” in the Article Search box, and clicking “Go.” Your search results will bring up the June and July columns. Click on “The grid grows up” to read the June column, and the July column is “How the smart grid will change your life.”


You don’t have to wait for futuristic smart grid technology to help your electric utility use its resources more efficiently. There are a lot of simple things you can do at home to help manage demand for electricity around the clock.

Kentucky’s hot, humid summers mean that peak power demand in June, July, August, and September often occurs in the afternoon beginning about lunchtime and extending through suppertime. From October through May, peak power demand often occurs later, from about suppertime until mid-evening at about 10 p.m. Anything you can do to avoid using a lot of electricity during these peaks will help your electric utility manage its resources throughout each day all year.

Try these new energy habits:
* Use the delay timer on your dishwasher so it starts at midnight instead of right after meals in the daytime.

* Recharge your cell phone, camera, and other battery-powered devices overnight.

* Start a load of laundry early enough in the day so that the dryer portion of the job will be finished before lunchtime.

* Save any ironing until late that evening, or early the next morning.

* Do the vacuuming before lunch.

* Don’t leave your computer turned on around the clock–use a power strip to turn off all parts of the system when you don’t need it.

* When you do turn on your computer, don’t turn on the printer until you really need to print something–and then turn it off again as soon as you’re finished.

* Post a “remember the peak” note in your laundry area, in your kitchen, in your office–anywhere you consistently use electricity–and then plan your use of appliances more carefully.

Next month: Is electricity use declining?

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