OG&E Smart Hours / Time of Use Pricing

One of the things I get questioned about in my personal/offline life is OG&E’s “Smart Hours” program. If you aren’t a customer of Oklahoma Gas and Electric, this is their “time of use” pricing program.  I have heard all sorts of interesting, creative theories about time of use pricing, so let me give you the low down.

Under time of use pricing, the price you pay per unit of electricity fluctuates up and down rather than remaining constant. How does this work?

First, you need a very basic understanding of the electric system. Electric companies do not use just one power plant; they have a variety of different types that run on different fuels and create differing amounts of electricity. Another key point is that they can’t store electricity; they have to make it and send it to the grid (and to you) immediately. During normal conditions, electric companies run “baseload” power plants. These types of power plants are usually the cheapest to operate and they run pretty much 24/7. As more people use more electricity at once, they turn on intermediate plants to create more electricity. These cost a little more to operate but they can turn on and off quickly to provided needed power. At the height of power needs, an electric company has to turn on their “peak” production power plants. These are the most expensive to run (and sometimes they are also the highest polluting), so they save these peak power units for last and only use them when they really need them.

The end result of this system is that the more people who use electricity at one time (say, during the heat of the day in the summertime), the more it costs to produce the electricity.  Under a normal pricing plan, average folks like us don’t notice the hourly changes in cost, but the price increases are still reflected in our overall rates. This is because the flat rate is based on a predicted average of the cost of production. You can see where this is going. If you can bring down the peak, you  bring down the flat rate over all, and theoretically you can also prevent the need to construct new power plants.

What Time of Use pricing, or here, “Smart Hours” pricing, does is allow the consumer to see and respond to the hourly changes in the cost of electric generation. It lets the consumer work together with the power company to benefit both parties by lowering the peak.

Here are some myths:

Time of Use pricing is a scheme to make me pay more for electricity.
False – The goal is *not* to make you pay the inflated rate of fifty cents a kilowatt hour (or whatever that high rate is) during peak times. The goal is to get you to use less electricity during those times when the rate is higher. Your immediate reward is a lower rate during off peak hours, so it’s entirely possible that you will pay less. In fact, for OG&E’s Smart Hours program, they are advertising that for this pilot year of the program you try it risk free – they guarantee you will not pay more under this plan than under the flat rate plan during the first year you are signed up. But even if you don’t pay less in your immediate bill, you may affect the overall rates for the next year, and drop those or prevent their rise, but unfortunately you can’t know if you succeed at this for sure.

In the case of Smart Hours, one of the motivators is that OG&E has a goal to postpone their need to build a new power plant until 2020 – construction of such a plant would actually cost ratepayers a considerable amount of money. This goal is no secret; it’s in some of their outreach materials. Partially because it takes so long to recoup the huge cost of building a new plant, OG&E is not itching to build one. If they can decrease use of electricity during the peak times, they are more likely to not need that new power plant any time soon. Smart Hours is one of their ways of working towards that goal.

Time of Use pricing is a scheme to increase the profit margins of the electric company.
False – Rate calculation is complicated and even I don’t understand all the ins and outs, but the generally correct answer is this: Electric companies are regulated by commissions whose job is to protect ratepayers/shareholders while playing it fair for the utility companies, and the profit margins for the electric utilities (at least in Oklahoma) are pre-set and calculated into the rates based on expected sales. So basically, Time of Use, Flat rate, whatever… profit margins should not be much affected. Theoretically. Either way it’s built into the rates.

Time of Use pricing is trying to get me to use less electricity. Weird…
Not really. They’re trying to encourage what is called “load shifting” which means that instead of choosing to handwash your laundry, you just run the washing machine in the morning rather than the afternoon. If this does mean that you learn to use less electricity in the process, kudos to you. That’s good for the environment and your pocket.

Signing up for Smart Hours means my pricing is weird all the time.
Under Smart Hours, your price will only fluctuate between 2 and 7, Monday through Friday, during the summer months. The rest of that time it will be at a constant lower rate. For that 2 to 7 time rate, you will be notified a day ahead what the price will be, allowing some planning time. Why only a day ahead? One of the reasons for this is that by the time they send you the rate for the next day, they have a pretty good idea what the weather will be and how that will affect electric generation.

I think this covers all of the main questions I’ve been getting, except for questions on how Smart Hours has affected me personally (How do you like it? Have you been paying more or less? Is it hard?). I’ll address those questions in my next post (Part 2).


Mark Cheek said...

What about them advertising 4.5¢/kWh for off-peak, when the actual rate is 6.08¢? That's a 25% markup for "fuel costs and taxes".

Alien Mind Girl said...

I agree that they should have said "4.5 cents plus fees" because the two different prices we were seeing confused my husband and I; we had to call to ask them why our signal said it was 4.5 cents but our thermostat said it was 6 cents.

However, these fees are applied to our bills when we're on the flat rate, as well; I think we are just more aware of them on Smart Hours due to the differing price signals.

I compared my bill from June last year to June this year just to be certain; last June I averaged 10.6 cents per kwh before fees, but after fees paid 12.1 cents; the difference is 1.5 cents for fees - similar to what we are seeing on Smart Hours. In contrast, this June's bill shows an average of 8.0 cents per kwh before fees and 9.3 cents after.

ConstanceB. said...

Wow! I signed up for Smart hours, but I had no idea how complicated their pricing would actually be. I did save $64 on last months bill, though. So i'm doing something right.

Great post, btw.