Time-of-use rate

Time-of-use rates change the price of electricity according to the time of day in which it is consumed. A time-of-use rate is structured so that a customer pays less during the utility’s off-peak period than it does during its peak period. The concept is that this rate a) more accurately aligns what the customer pays to the cost of generation or the cost of purchasing wholesale power and b) sends a price signal to customers to reduce power usage when rates are high. 

It is important to note that the wholesale price of power changes every hour of every day, and even within the hour, in some markets. So customers with a fixed price, or tiered pricing, do not really pay the actual cost of the power they consume many hours during the day. And if they pay the same rate across all hours of the day, there is very little motivation to shift usage from high-cost to low-cost periods of the day. By shifting usage to lower-cost periods, time-of-use rates can decrease the need for expensive peak power and even potentially reduce the need for new facilities. 

An example of time-of-use rates