Smart Meters and Time-of-Use Rates: Are the Prices as Smart as the Meters?

May 1010

• When deciding whether or not to invest money (or time) in an attempt to save money through conservation or load shifting, an appropriate price signal is essential to reach an economic decision. However, there is a concern about artificial Time-of-Use (TOU) rate differentials.
• In developing TOU rates, the Ontario Energy Board re-allocates some of the costs of the Global Adjustment away from the off-peak period to the mid- and on-peak periods. This produces ratios for TOU rates that may more closely approximate the true, total cost of electricity at different times of the day, but these rates are still artificial relative to how the current, total electricity commodity price is determined at the wholesale level.
• Such an incorrect price signal could cause a consumer to make a decision that is economic for her but uneconomic from the broader perspective.

Many Ontario electricity consumers already have a smart meter or will receive one in the next twelve months. Smart meters will allow utilities to implement Time-of-Use rates, charging different rates for electricity used at different times of day. Consumers are concerned about potential bill increases and are being told smart meters will help them to shift their usage pattern and save money. The question is: are customers getting the right price signal that will allow them to make economic decisions?

Smart Meters Are Coming

Smart meters and Time-of-Use rates are seen by some as critical conservation and demand management tools. The Ontario Government's target is to have 1 million consumers on TOU pricing by the summer of 2010 and 3.6 million by June 2011. By the end of March 2010, 3.7 million smart meters had been installed and 601,000 customers were on TOU pricing. Baseline plans submitted by electricity distributors indicate that by August of this year more than 1 million consumers will be on TOU rates.

Will Smart Meters Save You Money?

It's human nature to fear something new, including new electricity rates that will vary by the time of year, day and hour. Will the new billing method save you money? Analysis of TOU rates relative to non-TOU rates indicates the typical consumer will see an initial cost increase of $30 to $50 per year when they are switched to a smart meter. This means the consumer will have to find savings of $30 to $50 per year from changes in usage pattern just to break even on the smart meter implementation.

Will consumers actually look at their hourly data on the internet or when their monthly bill arrives? If they do, will they be able to connect the bill amounts to their behavior and consumption, days or weeks before, so that they can make the changes intended by TOU pricing?

Even if consumers do not look at their usage data, they might still reduce their electricity bill by making intuitive choices. Savings could come from eliminating wasteful usage and load shifting. The switch to TOU rates will make consumers generally aware that electricity is more expensive to produce and consume during hot summer weekday afternoons, so it might be worth turning back the air conditioner when leaving the house.

Changing behaviours where possible without spending money on something like a timer control always makes sense. However, choosing whether or not to actually spend money to achieve savings by eliminating wasteful usage or by shifting load is a decision that should be based on sound economics.

Recent Smart Meter Price Changes

Time-of-Use rates were adjusted on May 1, 2010.

	TOU Rates (cents/kWh)
	Before May 1/10	As of May 1/10
On-Peak	9.3	9.9
Mid-Peak	8.0	8.0
Off-Peak	4.4	5.3
Blended Rate	6.2	6.9

The 0.7 cent/kWh increase in the TOU blended rate was consistent with the increases seen in the May 1 adjustments for the non-TOU rates, and so was not unexpected. The thing that caught people's attention was the 20% increase in the off-peak rate from 4.4 to 5.3 cents.

Many conservation-minded parties also questioned the relatively low ratio of on-peak to off-peak rates (the on-peak is 1.9 times the off-peak rate) and whether that was enough to motivate conservation and load shifting behaviour. Gord Miller, Ontario's Environmental Commissioner, suggested a ratio of at least three and as high as five was necessary to provide adequate incentive. If mid-peak rates were held constant at 8.0 cents, the on-peak / off-peak rates would have to be from 12.8 / 4.3 cents/kWh to achieve a ratio of about 3:1 to 15.8 / 3.2 cents/kWh for a ratio of about 5:1. What would consumer reaction be to an electricity cost of 15.8 cents/kWh during a hot summer?

Price Signals and the Problem with Artificial Pricing

When deciding whether or not to invest money (or time) in an attempt to save money through conservation or load shifting, an appropriate price signal is essential to reach an economic decision.

Price signals are meant to show the value of a good in the overall economy. An incorrect price signal could cause a consumer to make a decision that is economic for her but uneconomic from the broader perspective.

The arrangements entered into by the Ontario Government, and in particular the Ontario Power Authority, have brought a lot of new generation capacity into the market. At the same time, demand has been dampened by moderate weather and a weak economy. The Hourly Ontario Energy Price is the spot price for electricity and represents the marginal cost of producing electricity in any hour. These days, even during on-peak periods, the Hourly Ontario Energy Price is modest, and shows only a small premium over off-peak prices.

The Ontario Energy Board (OEB) sets TOU Smart Meter Regulated Price Plan rates, and they are designed to recover from consumers the cost of the power they consume. In developing these rates, the OEB re-allocates some of the costs of the Global Adjustment away from the off-peak period to the mid- and on-peak periods. This produces ratios for TOU rates that may more closely approximate the true, total cost of electricity at different times of the day, but these rates are still artificial relative to how the current, total electricity commodity price is determined at the wholesale level.

The concern about artificial Smart Meter rate differentials is this: suppose a consumer determines that, based on her usage and the rates she is paying, she can reduce her electricity bill by $400 a year if she spends $300 on devices that will help her shift her electricity use from on-peak to off-peak. Seems like a good idea! But in the wholesale market, prices are flatter, and the difference in the marginal cost of the on-peak power she saves and the marginal cost of the off-peak power she is now using is perhaps only a $100 savings. The other $300 she saves are really just costs shifted from her to other consumers...not really a savings at all, when looked at from the perspective of the overall economy of Ontario. So, $300 has been spent to save $100. Not really sound economics.

Risks to consumers lie ahead with the continuing introduction of smart meters and fine-tuning of TOU prices needs to be done with caution.

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Global Adjustment Costs: Changing the Allocation Read more »