TIME-OF-USE TARIFFS

INNOVATION LANDSCAPE BRIEF

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ISBN 978-92-9260-115-7

Citation: IRENA (2019), Innovation landscape brief: Time-of-use tariffs, International Renewable Energy Agency, Abu Dhabi.

About IRENA
The International Renewable Energy Agency (IRENA) is an intergovernmental organisation that supports
countries in their transition to a sustainable energy future, and serves as the principal platform for
international co-operation, a centre of excellence, and a repository of policy, technology, resource and
financial knowledge on renewable energy. IRENA promotes the widespread adoption and sustainable
use of all forms of renewable energy, including bioenergy, geothermal, hydropower, ocean, solar and
wind energy in the pursuit of sustainable development, energy access, energy security and low-carbon
economic growth and prosperity. www.irena.org

Acknowledgements
This report was prepared by the Innovation team at IRENA’s Innovation and Technology Centre (IITC) and was authored by
Arina Anisie and Francisco Boshell with additional contributions and support by Harsh Kanani, Shikhin Mehrotra (KPMG India).

Valuable external review was provided by Kessels Kris (VITO), Ina Letho (Finnish Energy) and Yue Zhou (Cardiff University), along
with Carlos Fernández, Bowen Hong and Elena Ocenic (IRENA).

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to technical discussions on the promotion of renewable energy.
www.irena.org

1  HOW THEY WORK

 

Tariffs send customers price signals that reflect

2  BENEFITS FOR THE SYSTEM

 
system conditions.

Static (determined Dynamic (determined

in advanced) in real time based on actual
system conditions) Unlock demand response

€/kWh €/kWh
Reduce peak load and investments in grid
infrastructure

Time Time

4 SNAPSHOT 3 KEY ENABLING FACTORS

➜ US saved over 5 % on retail electricity sales due
to demand response, by implementing time-of-use Advanced metering infrastructure
tariffs in 2015
➜ Nordic market could achieve 15–20 GW of Digital technologies for automation
demand-side flexibility
Dynamic pricing, linking retail and wholesale
➜ Implemented in at least 17 EU countries markets
(including, Finland, France, Germany, Sweden)

WHAT ARE THEY?

Time-varying tariffs incentivise load adjustment, either manual or automated.

This allows customers to save on energy expenses while benefitting the system.

TIME-OF-USE TARIFFS
Demand-side flexibility is key for a renewable-powered future.
Tariffs that change with time of use enable demand response.
 I N N OVAT I O N L A N DS C A P E B R I E F

ABOUT THIS BRIEF

T his brief forms part of the IRENA project

“Innovation landscape for a renewable-powered
future”, which maps the relevant innovations,
to create actual solutions. Solutions to drive the
uptake of solar and wind power span four broad
dimensions of innovation: enabling technologies,
identifies the synergies and formulates solutions business models, market design and system
for integrating high shares of variable renewable operation.
energy (VRE) into power systems.
Along with the synthesis report, the project
The synthesis report, Innovation landscape for a includes a series of briefs, each covering one of
renewable-powered future: Solutions to integrate 30 key innovations identified across those four
variable renewables (IRENA, 2019), illustrates the dimensions. The 30 innovations are listed in the
need for synergies between different innovations figure below.

INNOVATION DIMENSIONS

ENABLING TECHNOLOGIES BUSINESS MODELS MARKET DESIGN SYSTEM OPERATION

1 Utility-scale batteries 12 Aggregators 17 Increasing time 25 Future role of distribution

2 Behind-the-meter 13 Peer-to-peer electricity granularity in electricity system operators
batteries trading markets 26 Co-operation between
14 Energy-as-a-service 18 Increasing space transmission and
3 Electric-vehicle
granularity in electricity distribution system
smart charging 15 Community-ownership
markets operators
4 Renewable models
19 Innovative ancillary
power-to-heat 16 Pay-as-you-go models
services
27 Advanced forecasting
5 Renewable 20 Re-designing capacity
of variable renewable
power-to-hydrogen power generation
markets
21 Regional markets 28 Innovative operation
6 Internet of things
of pumped hydropower
7 Artificial intelligence
22 storage
and big data 23 Market integration
8 Blockchain of distributed energy 29 Virtual power lines
resources 30 Dynamic line rating
9 Renewable mini-grids
10 Supergrids 24 Net billing schemes

11 Flexibility in conventional
power plants

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 T I M E- O F- U S E TA R I F FS

This brief provides an overview of a key innovation 

in market design: time-of-use (ToU) tariffs, also
referred to as a mechanism for implicit demand The brief is structured as follows:
response.
I Description
With a ToU tariff scheme, customers can adjust
their electricity consumption voluntarily (either II Contribution to power sector transformation
through automation or manually) to reduce their
energy expenses. As the name indicates, the III Key factors to enable deployment
price signals are time-varying, determined based
on the power system balance or on short-term IV Current status and examples of ongoing
wholesale market price signals. initiatives

Significantly, ToU tariffs unlocks demand-side V Implementation requirements: Checklist

flexibility and can thereby help to increase the
penetration of renewable energy. Examples show 
how various countries and regions have adopted
ToU tariffs and illustrate the impact of these tariffs
on the power system.the electricity system, such
as aggregators.

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 I N N OVAT I O N L A N DS C A P E B R I E F

I. DESCRIPTION

D emand response refers to the possibility

of changing energy loads during specific
time intervals by exposing consumers to the
This brief is focused on ToU tariffs, also called
price-based demand response programs. ToU
tariffs enable customers to adjust their electricity
correct cost-reflective price signals. The US consumption voluntarily (either through
Federal Energy Regulatory Commission (FERC) automation or manually) to reduce energy
defines demand response as “changes in the expenses. As the name indicates, the price signals
electric usage by demand-side resources from are time-varying, determined based on the power
their normal consumption patterns in response system balance or on short-term wholesale market
to changes in the price of electricity over time, price signals (such as day-ahead or intraday price
or to incentive payments designed to induce signals).
lower electricity use at times of high wholesale
market prices or when the system reliability is Time-based tariff structures can be static (e.g.,
jeopardised” (FERC, 2017). tariffs determined in advance) or dynamic
(e.g., tariffs determined in “real time” based on
Demand response can be achieved through ToU the actual system conditions). Dynamic tariff
tariffs, based on consumers’ reaction to price structures include real-time pricing, variable peak
signals (also referred to as implicit demand pricing and critical peak pricing /critical peak
response) or through incentive-driven demand rebates. Time-based rate programmes require
response, by trading committed and dispatchable advanced metering infrastructure (AMI). The table
flexibility on energy markets (also referred to as below gives an overview of time-based demand
explicit demand response) (SEDC, 2016). response pricing options.

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 T I M E- O F- U S E TA R I F FS

Table 1 Forms of time-of-use tariffs

Type of tariffs Nature of pricing Illustrative graphical representation Features

Static ToU pricing Static This typically applies to usage over

large time blocks of several hours,
€/kWh where the price for each time block is
determined in advance and remains
constant.
It can use simple day and night pricing
to broadly reflect on-peak and off-peak
hours, or the day can be split into
smaller segments, allowing several slack
periods.
Time Seasonality can also be taken into
account.

Real time pricing Dynamic Prices are determined close to real-

€/kWh time consumption of electricity and
are based on wholesale electricity
prices. Electricity prices are calculated
based on at least hourly metering
of consumption, or with even higher
granularity (e.g., 15 minutes).
Such tariffs are mostly composed of the
wholesale price of electricity plus
Time a supplier margin.

Variable peak Combination of A hybrid of static and dynamic pricing,

pricing static and dynamic €/kWh Market where the different periods for pricing
linked peak are defined in advance, but the price
pricing established for the on-peak period
varies by market conditions.

Time
Critical peak pricing Combination of A rate in which electricity prices
static and dynamic €/kWh increase substantially for a few days
in a year, typically during times the
wholesale prices are the highest.
E.g., French Tempo tariff is a contract
with a fixed price all year except for
a maximum of 22 days with very high
prices. Customer are notified of

Time

Source: Adopted from smartgrid.gov (n. d.) and EURELECTRIC (2017)

When there are constraints on the electricity participants who can both buy and sell electricity)
network, it makes sense to introduce location- to reduce electricity consumption from the grid
based tariff structures. Location-based tariffs or to inject electricity into the grid based on
reflect the cost associated with congestion network congestion. As such, ToU tariffs can be
in electrical networks (e.g., nodal pricing), applied to the supply of electricity or to the use
incentivising the consumers and prosumers (i.e., of the electricity network, or both.

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 I N N OVAT I O N L A N DS C A P E B R I E F

II. CONTRIBUTION TO POWER

SECTOR TRANSFORMATION

ToU tariffs do not impose a firm commitment on is key to enabling consumers to react to price
consumers. Consumers are free to decide how changes on short notice and to reaping the
and when to react to price signals and to adjust benefits of such a mechanism. Consumers can
consumption during specific time intervals. With also use energy storage systems, integrated
consumers’ higher responsiveness to price signals, with smart meters, to automatically charge
the whole power system, as well as consumers and discharge, depending on price variations.
themselves, can benefit. As an example, by applying dynamic prices in
combination with smart charging of electric
Providing power system flexibility – vehicles (EVs), EVs could alter their charging
Key for integrating variable renewable patterns to flatten the peak demand, fill the load
energy generation valleys and support real-time balancing of the
grids (Eid et al., 2016).
Demand response has the potential to become
one of the most cost-effective flexibility sources Reducing investments in grid
in a power system, key to enabling the integration reinforcement and peak capacity
of a high share of VRE generation. ToU tariff
programmes can shift demand towards periods The increasing responsiveness of customers
when renewable energy generation is abundant to tariffs allows system operators to save
and decrease consumption when there are investments in generation reserve capacities by
generation constraints in the system. shifting consumption to the off-peak time interval
or lower price time intervals. By reducing peak
ToU therefore has the potential to substantially demand, network upgraded investments can also
reduce the curtailment of VRE resources and be reduced, resulting in lower final tariffs.
improve the system’s reliability and predictability.
With real-time pricing, even shorter-term Also, by providing information about grid
variations in renewable energy output can be conditions through location-based pricing,
balanced with demand. market participants know the time and location
of system congestion and can react quickly based
Automation processes using smart appliances on the prices (IRENA, 2017). By optimising the
based on pre-set criteria according to consumers’ distributed energy resource (DER) participation
preferences can increase the responsiveness of in the local grid – incentivising a prosumer to
consumers to price signals. This can improve the supply a specific demand to decongest a line – or
predictability and reliability of demand response. by simply reducing demand in a specific location,
In the case of dynamic ToU tariffs, automation investments in the grid may be reduced.

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 T I M E- O F- U S E TA R I F FS

Potential impact on power sector transformation

The increased adoption of demand response • A feasible potential of about 8 GW of demand
programmes is expected to result in better side flexibility is available in Sweden if ToU
network management, with consumers being tariffs are implemented (The Nordic Council
conscious about their electricity consumption of Ministers, 2017).
during high price time periods.
• In a meta-study of several modelling exercises
• In a pilot conducted in Gotland, Sweden, to determine the potential for demand flexibility
customers participated in a programme that in the Nordic market, the Nordic Council of
used price signals. During the initial stage Ministers estimate a 1520  GW potential for
of the programme, 23 % of total electricity demand side flexibility resources if, amongst
consumption was experienced during the others, real-time pricing and metering,
five most expensive hours. This fell to 19 % information and communication technology
and 20 % in the first and second year of the (ICT) infrastructure and aggregator services
programme, respectively (World Economic are encouraged (The Nordic Council of
Forum and Bain & Company, 2017). Ministers, 2017).

• According to an estimate provided by the

American Council for an Energy-Efficient
Economy (ACEEE), in the US during 2015,
about 200 billion kWh of electricity, or more
than 5 % of retail electricity sales, were saved
due to demand response programmes. For
each 1 % reduction in retail electricity sales for
the retailers, on a median basis, a reduction in
the peak demand of about 0.66 % was found
to be achievable (ACEEE, 2017).

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 I N N OVAT I O N L A N DS C A P E B R I E F

III. KEY FACTORS TO ENABLE

DEPLOYMENT

Deployment of advanced metering Adoption of smart appliances and

infrastructure automation control

Advanced metering to track the consumption of Automation control using smart appliances based
individual consumers is a prerequisite for market- on pre-set criteria according to consumers’
based pricing schemes. Smart meters that record preferences can increase the responsiveness of
the consumption at an hourly, half-hourly or consumers to price signals. Dedicated software
quarter-hourly basis are required at each of the can allow customers to set price preferences,
consumption connection points. using automation control, for operating the
connected appliances. In addition, customers
Advanced metering infrastructure (AMI) integrates participating in price-based demand response
smart meters, communications networks and programmes may allow the operators to make
data management systems to enable two- small adjustments to their energy consumption
way communication between suppliers and during critical periods in exchange for a payment
customers. AMI also enables the collection and or rebate from the retailer.
storage of customer consumption profiles on an
hourly or sub-hourly basis. This allows retailers to One example of automation control is electric
implement refined rate structures that can better heating at lowest daily prices. This can be done
cover the costs of energy production and supply. with relatively simple automation: the customer
has hourly pricing based on the day-ahead price.
AMI can also integrate additional technologies, An algorithm can determine how many hours the
such as web-based portals that enable customers water boiler (storing electrical heating) needs to
to analyse their hourly electricity usage, compare be turned on during one day based on previous
their usage to other local consumers and gather data and outdoor temperature (for example, seven
information about the options to manage their hours). Then, the algorithm creates a calendar
electricity consumption better. Such data could that determines on which hours the heaters is
also be used by customers when requesting a turned on or off (for example, choosing the seven
new (or better) offer from other suppliers in the cheapest hours). This calendar is then sent daily
markets when switching contracts. to the smart meter, which has a relay that is
connected to the heater/boiler and controls it.

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 T I M E- O F- U S E TA R I F FS

This example requires very little communication However, the focus should be on finding the
between the customer and the supplier (calendar customers that can benefit the most (by reducing
updated daily), and the algorithm can be relatively their electricity bill and providing benefits to
simple. The main requirements are that the smart the system). These are domestic customers with
meter is equipped with the relay, the heater/boiler loads that are large enough and controllable
is connected to the relay and there is an interface enough, namely electric heating, cooling and
that can be used to send the calendars. If this ventilation loads, as well as EVs, if available. For
interface is open and standardised, customers example, Finland has an estimated 1  800 MW  of
can contract with any chosen market party to give domestic heating loads that could relatively easily
consent to control the relay to provide customers participate in demand response.1
with the control service needed to benefit from
implicit demand response. Defining the methodology for
formulating dynamic prices
Consumer engagement and
communication Dynamic tariffs, in particular real-time pricing,
are more difficult to implement, as they require
Because ToU tariffs do not require a firm continuous exchange of information between
commitment by consumers, who are left to decide actors in the retail market, the wholesale market
how and when to react to the price signals given, and system operators. Dynamic prices can be
consumer engagement is often a challenge. For derived using various methods, such as indexing
example, a 2015 study in a selection of European with a weighted average of current and past
Union countries showed the main underlying wholesale prices, using advanced statistical
barriers to dynamic pricing in electricity supply techniques, and so forth.
tariffs to household consumers are a lack of
awareness of consumer benefits, followed by For example, the Finnish system is an interesting
insufficient savings to be made (as perceived by case study because the whole value chain from
consumers) and the lack of policy framework in wholesale market to the individual smart meter
support of dynamic pricing (ACER/CEER,2016). is unbroken, in the sense that suppliers pass the
wholesale market price directly on to consumers.
Some consumers may be satisfied with business Therefore, one day after physical delivery,
as usual, even though they could save money suppliers get the measured hourly consumption
within demand response programmes. For data of each of their customers (smart metering
industrial loads where the cost savings can be point). Consequently, the retail supplier can define
substantial, higher responsiveness to demand dynamic pricing as spot-price plus a margin.
response programmes might be easier realised.

For domestic consumers, effective demand

response might be easier achieved with
automation control that enables their loads to
respond automatically to price signals, without
their active participation via manual response.

1 Based on discussions during the IRENA Innovation Week, September 2018.

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 I N N OVAT I O N L A N DS C A P E B R I E F

IV. CURRENT STATUS AND

EXAMPLES OF LEADING
INITIATIVES

S ome of the key indicators about ToU tariffs

have been captured in the table below,
followed by case studies on country-specific
adoption of ToU tariffs.

Table 2 ToU tariffs: Key indicators

Key parameters Description

17 European countries (including Sweden, Germany, Finland, France, Germany),

Countries where ToU tariffs are applied
USA, India

Static ToU tariffs: Day/night ToU differentiation (this is very common in Europe;
e.g., in Italy, all low-voltage consumers are mandatorily exposed to ToU pricing if
they do not choose a supplier in the liberalised market).
Dynamic real-time pricing: Estonia, Romania, Spain Sweden and the UK applied
such tariffs (e.g., between 25 % and 50 %
of all households in Estonia and Spain incur their supply charges based on hourly
Types of ToU adopted pricing).
Other dynamic pricing methods: These apply in Denmark, Norway and Sweden,
where electricity consumers incur
spot-market-based pricing through the monthly average wholesale price.
Critical peak pricing: This is applied to a smaller extent in the UK, Lithuania,
Portugal, Romania and France (ACER, 2016).
• Implicit demand response (participation of consumers in the energy transition).
• Consumers benefits, such as electricity bill savings.
Services provided • Cost-reflective tariffs benefiting suppliers
• Increased competition among suppliers in the retail market,
as a driver for innovative business models.

Finnish dynamic pricing structure The price is determined based on the Nord Pool
spot price for the price area of Finland. The
In Finland, consumers have the option of choosing customer, who chooses a dynamic price tariff
a dynamic pricing tariff structure for electricity. structure, pays the hourly price, retailer’s premium
Retail suppliers offer dynamic pricing to and a monthly fixed fee to the retailer with which
consumers who chose to do so in the liberalised they opted to enter into a contract.
market (as opposed to regulated markets).

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 T I M E- O F- U S E TA R I F FS

By the end of 2017, approximately 9 % (about Real-time pricing in Illinois (U.S.) –
340  000) of customers had opted for this tariff Consolidated Edison (Con Ed)
structure (Energy Authority, Finland, 2018;
EURELECTRIC, 2017). The customer can check In a demand response programme in Illinois,
electricity prices for each hour of the succeeding launched by Con Ed, a utility operating in the United
day from the chosen retailer’s website. The States, consumers were given the opportunity
published prices are based on the spot market to participate in an hourly pricing programme
timetable. Therefore, the prices for the next day in which electricity prices were reflective of the
(24  hours), starting from midnight, are finalised electricity load (i.e., prices were low during the
at around 2 p.m. of D-1 (day ahead). The price low demand period and prices were high during
that the customer pays for a particular time the high demand hours). An example of demand
slot depends on the time of consumption. This shifting by consumers includes pre-cooling the
customer requires hourly metering, which is the house in early morning hours, when prices are
case for all consumers in Finland. Customers lower, and setting the cooling systems to an idle
can see their hourly consumption one day mode when prices are higher. The programme
after delivery on their local distribution system has allowed consumers to save about 15 % on
operator’s (DSO’s) web portal or application. their electricity bills (USD 15 million from 2007 to
2016) (Energy News Network, 2016).
Apart from the above pricing structure, some
retailers offer price-optimised heating hours, Reducing renewable energy curtailment
depending on weather conditions and actual – Reverse demand-response programme
heating capacity. This enables the current heating in Arizona (U.S.)
system to operate efficiently and helps to save up
to 15 % on heating expenses (EURELECTRIC, 2017). The Arizona Public Service Company (APS), a
utility in the United States, experiences demand
New market design in the European Union peaks in summer due to increased space cooling
use. However, with more moderate temperatures
While there is significant variation in the during the remaining nine months of the year, the
penetration of ToU tariffs among electricity utility has excess renewable energy that is often
consumers in the European Union, the new curtailed. The electricity prices during some time
draft Electricity Directive and Electricity intervals in the daytime turn negative on account
Regulation (being part of the Clean Energy for of solar generation exceeding demand.
All Europeans legislative package) sets new
rules for consumers throughout the union. For APS recently proposed a new programme
example, via the new market design rules, every that aims to reduce the need to curtail solar
consumer in the European Union would be energy during the periods of negative pricing.
able to offer demand response and to receive Instead of curtailing renewable production, APS
remuneration, directly or through aggregators. will pay customers to use energy to keep the
Dynamic electricity price contracts reflecting renewables online and smooth the load curve.
the changing prices on the day-ahead or This is similar to load shifting. However, since it
intraday markets would allow consumers to is less predictable in terms of the on-peak/off-
respond to price signals and actively manage peak price arbitrage (due to the intermittency
their consumption. As such, consumers would of the renewables), the APS programme will be
be able to freely choose and change suppliers specific to the dispatchable non-essential loads.
or aggregators, while also being entitled to a For example, EVs with smart charging could off-
dynamic price contract. Additionally, the new take the free or negatively priced energy when
framework foresees the entitlement of every the reverse demand response is activated, and
consumer to request a smart meter equipped smart appliances (e.g., dishwashers, washing
with a minimum set of functionalities, and it machines, dryers, etc.) could be set to run during
improves pre-existing rules on the consumers' these times as well.
ability to share their data with suppliers and
service providers by clarifying the role of the
parties responsible for data management and
by setting a common European data format (EU
Commission, 2016).

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 I N N OVAT I O N L A N DS C A P E B R I E F

V. IMPLEMENTATION
REQUIREMENTS: CHECKLIST
TECHNICAL Hardware:
REQUIREMENTS • Advanced metering infrastructure (AMI) to enable two-way communication between
the demand response participants and the system operators. AMI will also enable the
collection and storage of the customer consumption profile on an hourly or sub-hourly basis.

Software:
• Energy management systems that can respond to electricity price signals and automatically
adjust consumption according to the customer’s preferences, such as during peak price periods.

Communication protocols:
• Agree to and develop common interoperable standards (at both the physical and
ICT layers) to increase the co-ordination between the consumer, demand response
aggregators and system operators.

REGULATORY Wholesale market:

REQUIREMENTS
• Allow easier and equal access to the wholesale market to all kinds of flexibility
service providers.
• Reveal the value of flexibility by a more granular market time representation.

Distribution system:
• Incentivise distribution system operators and/or consumers to adopt smart metering
solutions, including innovative ICT infrastructure financing models.

Retail market:
• Regulators should define a standardised methodology for computing dynamic prices that
can be adopted by retailers.
• Functioning retail markets could provide innovative products and pricing models for
various customer needs. For example, in Finland innovative products are being introduced,
and customers can opt to choose the product and pricing method best suited to their needs
(such as hourly dynamic pricing, retailers buying excess solar photovoltaic generation as a
marketbased solution, ToU tariffs, etc.).
• Regulation should set clear roles and responsibilities for market parties.
Long-term foreseeable regulation is needed.
• Liberalised markets, as opposed to regulated markets, could facilitate the market entry

STAKEHOLDER Consumers:
ROLES AND • Engage in demand response programmes.
RESPONSIBILITIES
• Change to suppliers/retailers offering ToU tariffs.

Retailers:
• Customers should be adequately informed about the opportunities and risks of dynamic
pricing contracts. As these contracts become more commonplace, consumers’ awareness
and learning will further increase with their participation or the participation of someone
they know.
• Involve the customer in the design of the tariff. The involvement of customers in the
design phase, such as through public consultations, could improve the acceptance of
the dynamic pricing scheme as consumer preferences could be taken into consideration.

State institutions/Regulators:
• Conduct cost-benefit analyses assessing to what extent demand response would bring
social welfare benefits before investing in costly enabling infrastructure.
• Provide incentive-based policy frameworks for the deployment of innovative
technologies in the distribution network.
• Understand customer behaviour and create awareness of the possibility of using
load management.
• Encourage pilot programmes and disseminate the results publicly.

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 T I M E- O F- U S E TA R I F FS

ABBREVIATIONS
ACEEE American Council for an GW Gigawatts
Energy-Efficient Economy ICT Information and communication
AMI Advanced metering infrastructure technology

APS Arizona Public Service Company IoT Internet of Things

BtM Behind-the-meter kWh Kilowatt-hours

ConEd Consolidated Edison P2P Peer-to-peer

D-1 Day ahead ToU Time-of-use

DER Distributed energy resource TSO Transmission system operator

DSO Distribution system operator VRE Variable renewable energy

EV Electric vehicle

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