Buzzword: Demand-Response Pricing

What it means. Demand-response pricing involves some of the latest technology but is based on age-old supply-and-demand economics. Electric-utility customers have traditionally been charged a flat rate for electricity—the current national average is about 11 cents per kilowatt hour. But that pricing model doesn't reflect the real power-generating costs, which are in constant flux since they are affected by market conditions. When the demand for electricity is high, costs go up. When it's low, costs drop. Demand-response pricing is a way to capture these variable rates.

Why the buzz? Demand-response pricing is widespread in the industrial sector and is becoming more common in residential markets, mainly because the Federal Energy Policy Act of 2005 directed utility commissions to consider implementing demand-response-pricing programs. Demand-response pricing has popped up during past energy crises, when it was called time-of-day pricing.

As part of the Tampa Electric Company's Energy Planner program, participating customers get a state-of-the-art thermostat (shown) installed at their home. About 250 TECO customers use the device to wirelessly control their central air conditioner, electric water heater, pool pump, and other appliances. For example, customers can save themselves money by programming the thermostat to turn off the AC or other electricity hogs during periods of peak demand, when electricity costs the most.

TECO offers Energy Planner customers four electricity rates instead of its standard single flat rate of 11.4 cents per kilowatt hour. The peak period, when electricity is at a peak 17.245 cents per kWh, is from 1 p.m. to 6 p.m. from May through October and 6 a.m. to 10 a.m. from November through April. The cheapest electricity—€”7.861 cents per kWh—€”is in effect from 11 p.m. to 6 a.m. (and 5 a.m. during winter). The medium rate of 9.171 cents per kWh runs from 6 a.m. to 1 p.m. during the summer and 10 a.m. to 11 p.m. during the winter. The critical rate, which TECO says will take effect only 1.5 percent of the time over the course of a year, is 50.099 cents per kWh.

To take advantage of the cheapest rates, customers have to be more conscious of when and how they use electricity. Frank Giordano, a work-from-home financial planner who lives in a 2,250-square-foot home near Tampa, isn't complaining. Since enrolling in Energy Planner, Giordano runs the pool pump and water heater only overnight; if needed for postdinner cleanup, he will turn on the water heater in the early evening.

As for the air conditioner, it's set at a constant 76°F. Even with the air conditioner frequently on, Giordano says he and his wife saved about $400 their first year in the program. The Giordanos have made some minor lifestyle adjustments—doing laundry in the early morning, for example—but the savings make up for any inconvenience.

"You learn how to live with it," Giordano says. "If something saves you money, wouldn't you?"—€”Daniel DiClerico

Essential Information: To learn more about demand-response pricing, read our report on smart meters. And read our review of thermostats, an excellent way to cut your utility bills.