Time-of-Use Rates and Solar: How Peak Pricing Works

Time-of-use (TOU) rates are an electricity pricing structure in which the price per kilowatt-hour varies by the time of day. Unlike a flat rate, where every kilowatt-hour costs the same, TOU rates charge more during periods of high demand (peak) and less during periods of low demand (off-peak). This pricing reflects the actual cost of generating and delivering electricity, which rises when many customers draw power simultaneously, typically in the late afternoon and early evening.

For a solar owner, TOU rates change the financial calculus. A solar array produces the most energy around midday, which often coincides with a mid-peak or off-peak period. The energy consumed from the grid in the evening, when production has fallen to zero, is often billed at the peak rate. The mismatch between solar production and household consumption is the central challenge under TOU pricing. The value of solar depends not only on how much energy the array produces, but on when that energy is produced and how the utility credits it.

How Time-of-Use Rates Work

TOU rates divide the day into blocks, each with a different price. The exact blocks and prices are set by the utility and approved by a state regulator. A typical structure might include:

• Off-peak: late night and early morning, lowest price.
• Mid-peak: morning and late afternoon, intermediate price.
• On-peak: early evening (e.g., 4 p.m. to 9 p.m.), highest price.

The on-peak period is designed to discourage consumption when the grid is stressed. In many regions, the on-peak window extends into the evening, after sunset, which is precisely when solar production is zero. This is the core conflict: solar panels generate during the day, but households often use the most electricity in the early evening when they return home and turn on appliances, air conditioning, and lighting.

Why Solar Economics Change with TOU

Under a flat rate, every kilowatt-hour of solar production offsets the same cost. Under TOU, the value of a solar kilowatt-hour depends on the rate at the moment of production. If the utility credits solar exports at the same TOU rate that applies at the time of export, then a kilowatt-hour produced at 2 p.m. (off-peak) is worth less than one produced at 5 p.m. (on-peak). Unfortunately, solar production peaks at midday, not in the late afternoon.

This mismatch has two consequences:

1. Reduced bill savings: The solar energy that is exported to the grid during off-peak hours earns a lower credit than the energy purchased from the grid during on-peak hours. The net effect is that the bill savings per solar kilowatt-hour may be less than under a flat rate.

2. Incentive for storage: A battery can store solar energy produced during the day and discharge it during the on-peak evening hours, allowing the household to use that energy instead of buying expensive grid power. This is why TOU rates often make battery storage more attractive.

The financial impact depends on the specific TOU schedule and the utility’s net metering policy. Some utilities offer net metering where exports are credited at the retail rate, but under TOU, that retail rate varies. Others offer net billing, where exports are credited at a lower rate, often the utility’s avoided cost. These policies are set by state and by utility, and they change. Check with the local utility for the current TOU schedule and net metering terms.

Net Metering and TOU: The Interaction

Net metering is a billing mechanism that credits solar owners for the excess electricity they export to the grid. Under TOU, net metering can be applied in different ways:

• Monthly netting: The utility sums the kilowatt-hours exported and imported over the billing period and charges for the net. Under TOU, the exported and imported kilowatt-hours are valued at their respective TOU rates. If the household exports more during off-peak and imports more during on-peak, the net bill may still be significant.
• Real-time netting: Some utilities use a meter that tracks the net flow in each time period. The bill is the sum of the net energy in each period times the corresponding rate. This is more favorable if the household can shift consumption to off-peak.

Net metering rules vary widely. Some states have net metering with TOU rates, others have net billing (also called net metering 2.0 or 3.0) where exports are credited at a lower rate. The rules are set by the state legislature or public utility commission and can change. Always verify the current policy.

What People Get Wrong About TOU and Solar

A common misconception is that solar panels automatically save money under TOU rates because they produce during the day. The mistake is assuming that all solar production is valued equally. In reality, the value of solar is time-dependent. A solar array that produces 1,000 kilowatt-hours per month may offset only a fraction of the evening peak usage, leaving a large bill for on-peak consumption.

Another mistake is thinking that a larger solar array is always better. Under TOU, adding more panels may simply increase the amount of energy exported at off-peak rates, which yields a lower return than the energy that would have been consumed on-site. The optimal array size is one that covers the daytime consumption without overproducing, unless the export credit is high.

A third error is ignoring the rate schedule entirely. Many homeowners sign a solar contract without checking whether their utility has TOU rates or what the peak hours are. The result is a system that saves less than expected. The fix is to obtain the utility’s TOU schedule and calculate the savings based on the household’s actual usage pattern.

These mistakes are natural because solar marketing often emphasizes total production and gross savings, not the timing of that production. The solution is to analyze the specific rate structure and usage profile.

Battery Storage and TOU

Battery storage can shift solar energy from off-peak to on-peak periods. A typical strategy is to charge the battery during the day with solar power, then discharge it during the evening peak. This allows the household to avoid buying expensive on-peak electricity. The economic benefit depends on the difference between the on-peak and off-peak rates, and the cost of the battery.

Batteries also provide backup power during outages, which is a separate benefit. However, the financial case for a battery is stronger under TOU rates with a large peak-to-off-peak price spread. If the spread is small, the battery may not pay for itself.

Comparing TOU Structures

The following table compares common TOU structures and their implications for solar owners. The “Not Applicable” column indicates when a particular structure does not apply.

What to Check with Your Utility

The rules for TOU and solar are local. To understand the economics, the following must be verified:

• TOU schedule: The exact hours and rates for each period, and whether they change seasonally.
• Net metering policy: How exports are credited, and whether the credit is at the retail rate or a lower rate.
• Interconnection requirements: The process for connecting a solar system to the grid.
• Incentives: Any state or utility incentives that affect the cost of the system.

These factors are set by the state and utility and they change. A rate schedule that is favorable today may be revised in a few years. The solar owner should review the utility’s website or contact them directly for the current terms.

Conclusion

Time-of-use rates fundamentally change the value of solar energy. The mismatch between solar production and peak consumption means that the financial return depends on the rate structure, the household’s usage pattern, and the availability of storage. Understanding the TOU schedule and net metering rules is essential for making informed decisions about solar system size and battery storage. The information provided here is general; specific rules vary by location and are subject to change.