Electricity Pricing Based on Demand and Challenges

In an ideal market, the prices of goods or services are determined by demand and supply. Both demand and supply constantly change, causing prices to fluctuate. For example, the increase in airfare during holiday seasons due to higher demand for flights.

Likewise, such is the situation for the availability and pricing of electricity. Experts call this dynamic retail pricing or “Time-of-Day” (TOD) charges. TOD charges are globally recognized as a way to incentivize consumers to shift their demand from high-demand periods to low-demand periods, thereby alleviating the burden on the grid during peak demand.

Many countries around the world have implemented TOD charges. Countries like the United States, Canada, the United Kingdom, Australia, Japan, Germany, France, Italy, Spain, and Sweden are among them.

The Indian government recently made two important amendments to the Electricity (Consumer Rights) Rules, 2020.

The ToD tariff system will be applicable to commercial and industrial consumers with a maximum demand of 10 kilowatts or more starting from April 1, 2024, and for all consumers, except agricultural consumers, starting from April 1, 2025.

During “solar hours,” which are eight hours in a day, the tariff will be 10% to 20% lower than the normal rate, while during peak demand hours, it will be 10% to 20% higher. Several state electricity regulatory commissions have already implemented ToD tariffs for large commercial and industrial categories.

Smart meters send electricity consumption data to distribution companies every 15 minutes, which is crucial for calculating ToD tariffs.
The ToD tariff system is expected to lead to changes in consumer behavior since applications such as electric vehicle charging, washing machines, and cooling can be shifted to low-demand hours.

Consumers may need to monitor their electricity usage during different time periods, which can be a significant challenge. Not all consumers may be prepared or capable of adapting to these changes. If a consumer is unable to shift their usage to low-demand times, they may end up paying higher prices during high-demand hours.

This plan effectively incentivizes consumers who are capable of or interested in changing their energy consumption patterns based on different times of day.