Time-based pricing

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Time-based pricing is a pricing strategy where the provider of a service or supplier of a commodity, may vary the price depending on the time-of-day when the service is provided or the commodity is delivered. The rational background of time-based pricing is expected or observed change of the supply and demand balance during time. Time-based pricing includes fixed time-of use rates for electricity and public transport, dynamic pricing reflecting current supply-demand situation or differentiated offers for delivery of a commodity depending on the date of delivery (futures contract). Most often time-based pricing refers to a specific practice of a supplier.

Utilities[edit]

Time-based pricing of services such as provision of electric power includes, but is not limited to:[1]

  • time-of-use pricing (TOU pricing), whereby electricity prices are set for a specific time period on an advance or forward basis, typically not changing more often than twice a year. Prices paid for energy consumed during these periods are preestablished and known to consumers in advance, allowing them to vary their usage in response to such prices and manage their energy costs by shifting usage to a lower cost period or reducing their consumption overall;
  • critical peak pricing whereby time-of-use prices are in effect except for certain peak days, when prices may reflect the costs of generating and/or purchasing electricity at the wholesale level
  • real-time pricing (also: dynamic pricing) whereby electricity prices may change as often as hourly (exceptionally more often). Price signal is provided to the user on an advanced or forward basis, reflecting the utility's cost of generating and/or purchasing electricity at the wholesale level; and
  • peak load reduction credits for consumers with large loads who enter into pre-established peak load reduction agreements that reduce a utility's planned capacity obligations.

Live dynamic pricing is recommendable for utilities both in regulated or market based environment. The use of live dynamic pricing is not limited in case of low difference between peak- and off-peak demand, unavailability of adequate time-of-use metering. Also, customer response to time-based pricing should be considered (see: Demand response).

A regulated utility will develop a time-based pricing schedule on analysis of its cost on a long-run basis, including both operation and investment costs. A utility operating in a market environment, where electricity (or other service) is auctioned on a competitive market, time-based pricing will reflect the price variations on the market. Such variations include both regular oscillations due to the demand pattern of users, supply issues (such as availability of intermittent natural resources: water flow, wind), and occasional exceptional price peaks.

Price peaks reflect strained conditions on the market (possibly augmented by market manipulation, see: California electricity crisis) and convey possible lack of investment.

References[edit]

  1. ^ Partially reworded from United States Energy Policy Act of 2005, sec. 1252. Smart metering

See also[edit]