Why Electricity Prices Vary by Time of Day

Why the same unit of electricity can cost far more in the evening than at midday, and how time-of-use pricing puts that to work.

A unit of electricity used at two in the afternoon is physically identical to one used at eight in the evening, yet it can cost very different amounts to supply. That is because demand for electricity rises and falls through the day, and meeting the busiest moments is far more expensive than meeting the quiet ones. The busiest period is called peak demand, and the quieter hours are called off-peak.

The daily rhythm of demand

Electricity use follows the rhythm of daily life. In many places, demand is low in the early morning, climbs as people wake and businesses open, and reaches its highest point in the evening, when people come home, cook, switch on lights and run fans or air conditioners. In hot climates, the afternoon can also be very busy. Seasons matter too: many parts of India see demand peak in the hot summer months, while colder countries peak on winter evenings.

Why peaks are expensive

Remember that grid operators call on power plants from cheapest to most expensive. At quiet times, cheap plants can meet all the demand. As demand climbs, more expensive plants must be switched on, and the price rises. At the very top of the peak, the grid relies on a peaker plant, a power station built to run only for short periods of high demand, often a gas turbine that can start within minutes. Peaker plants may run for only a small fraction of the year, so all their building and maintenance costs must be recovered from those few hours, which makes their electricity very expensive.

Solar power has added a new twist. On sunny days, solar floods the grid with cheap electricity around midday, pushing prices down. As the sun sets, solar output falls just as evening demand rises, so other plants must ramp up quickly. In places with lots of solar, the most expensive hours are now often in the early evening.

Shifting the washing machine

Suppose a household is on a time-of-use tariff that charges 5 rupees per unit from 10 in the morning to 5 in the afternoon, but 9 rupees per unit from 6 to 10 in the evening. A washing machine cycle uses about 1 unit. Running it every evening for a month of 30 days costs about 270 rupees, while running it at midday costs about 150 rupees. By simply changing the timing, the family saves about 120 rupees a month, and the grid faces a slightly smaller evening peak.

Time-of-use tariffs and demand response

Most households have traditionally paid one flat price per unit no matter when they use power. That hides the true cost of peak electricity. A time-of-use tariff charges different prices for different hours, so customers see higher prices at busy times and lower prices at quiet ones. Smart meters, which record when electricity is used, make these tariffs possible. India has begun introducing time-of-day tariffs, starting with larger commercial and industrial users.

Closely related is demand response, where customers are rewarded for cutting or shifting their use when the grid is under strain. A factory might delay a power-hungry process by an hour, or a building might briefly turn its cooling down a notch. Every unit of demand shifted away from the peak can mean one less expensive peaker plant needs to run, or even be built.

Thinking time-of-use pricing only benefits power companies

Time-of-use prices can look like a way to charge more. But when customers shift use away from peaks, the whole system needs fewer costly peaker plants and less spare capacity, which lowers costs overall. Households that can shift some use, such as charging, laundry or water pumping, often pay less than they would on a flat rate.

Key takeaways

Electricity demand rises and falls through the day and across seasons.
Meeting peak demand requires expensive plants, so peak power costs more to supply.
Peaker plants run only a few hours a year and must recover their costs in that short time.
Plentiful midday solar has shifted the costliest hours towards the early evening in many places.
Time-of-use tariffs and demand response encourage people to shift use away from peaks.