Smart Thermostat and Time of Use Electricity Rates

What Time-of-Use Rates Are

Under a flat-rate electricity plan, you pay the same price per kilowatt-hour regardless of when you use electricity. Under a time-of-use plan, the price varies by time of day, typically divided into three tiers: off-peak (cheapest, usually overnight and early morning), mid-peak (moderate, usually midday), and peak (most expensive, usually late afternoon through early evening).

The price difference between tiers is substantial. In California, for example, PG&E's residential TOU rates can range from about $0.30 per kWh during off-peak hours to $0.50 or more per kWh during peak hours, a difference of 60% or more. In states with competitive retail electricity markets like Texas, some TOU plans have even wider spreads, with off-peak rates as low as $0.05 per kWh and peak rates reaching $0.25 to $0.35 per kWh.

Peak hours typically align with the highest electricity demand on the grid, which is usually between 4:00 PM and 9:00 PM on weekdays during summer (when everyone comes home and runs air conditioning) and between 6:00 AM and 9:00 AM plus 5:00 PM to 8:00 PM in winter (morning and evening heating peaks). The exact hours vary by utility, and some plans have different peak schedules for summer and winter.

TOU rates are becoming more common as utilities modernize their metering infrastructure. Many states now offer TOU as an opt-in alternative to flat rates, and some (like California) have made TOU the default rate structure. If your utility offers TOU and you can shift a meaningful portion of your electricity usage to off-peak hours, the savings can be significant.

How Smart Thermostats Optimize for TOU Rates

The core strategy is simple: use the HVAC system aggressively during cheap off-peak hours to pre-condition the house, then let the house coast through expensive peak hours with minimal or no HVAC usage. A smart thermostat automates this by adjusting its schedule and setpoints based on your utility's rate schedule.

Pre-cooling in summer. Before the peak pricing window begins (typically 4:00 PM), the thermostat runs the air conditioner to cool the house 2 to 4 degrees below your normal comfort setpoint during cheaper off-peak or mid-peak hours. Then, during peak hours, the thermostat raises the setpoint to your normal comfort temperature and lets the house gradually warm back up. Because the house was pre-cooled, the temperature stays comfortable for several hours without the AC running, and you avoid paying peak rates for the bulk of your cooling load.

Pre-heating in winter. The same strategy works in reverse for heating. Before morning peak hours, the thermostat heats the house a few degrees above the normal setpoint using cheap overnight electricity. During peak hours, it lets the temperature coast down naturally. The effectiveness depends on your home's insulation: a well-insulated home holds the pre-heated or pre-cooled temperature much longer than a poorly insulated one.

Some smart thermostats have built-in TOU awareness. The Nest Learning Thermostat can be configured with your utility's rate schedule, and its algorithms factor electricity cost into scheduling decisions. Ecobee's eco+ feature includes a "Time of Use" module that automatically pre-conditions the home before peak periods. Other thermostats can achieve the same result through manual schedule programming that aligns setpoint changes with your rate tier boundaries.

Calculating Your TOU Savings

The additional savings from TOU optimization depend on the price spread between peak and off-peak rates, how much of your HVAC usage you can shift to off-peak hours, and how well your home retains conditioned air during peak hours.

Consider a household that uses 30 kWh per day for cooling during summer. Under a flat rate of $0.15 per kWh, the daily cooling cost is $4.50. Under a TOU plan with off-peak at $0.10 and peak at $0.30, if the household shifts 20 kWh of that cooling to off-peak (through pre-cooling) and only uses 10 kWh during peak, the daily cost becomes ($0.10 x 20) + ($0.30 x 10) = $5.00. That is actually more than the flat rate, which illustrates an important point: TOU only saves money if the price spread is large enough to offset the total energy used.

However, pre-cooling typically reduces total cooling energy as well, because the house starts the peak period at a lower temperature and the AC runs fewer total hours. Adjusting the scenario to 25 kWh total (5 kWh saved through the more efficient pre-cooling pattern), with 20 kWh off-peak and 5 kWh peak, the daily cost becomes ($0.10 x 20) + ($0.30 x 5) = $3.50, a 22% savings compared to the flat rate.

Across a 120-day cooling season, that $1.00 per day savings adds up to $120, on top of the $150 to $240 in baseline smart thermostat savings. For homeowners in areas with wide TOU spreads (California, Arizona, Texas, and other hot-climate states with aggressive TOU programs), the combined savings can reach $300 to $400 per year.

Which Homes Benefit Most From TOU Optimization

Well-insulated homes. Pre-cooling and pre-heating are most effective when the house can hold the conditioned temperature for hours without the HVAC running. A well-insulated home with good air sealing might maintain a comfortable temperature for four to six hours after the HVAC shuts off, which covers most of the peak window. A poorly insulated home might give back the temperature gain within one to two hours, requiring the HVAC to run during peak hours anyway.

Homes with thermal mass. Concrete slab foundations, tile floors, and masonry walls absorb and store thermal energy, acting as a natural battery. Pre-cooling a home with a concrete slab floor stores cold energy in the slab, which continues radiating coolness into the room for hours after the AC stops. Lightweight wood-frame homes with carpet over a raised foundation have less thermal mass and lose their pre-conditioned temperature faster.

Homes in hot climates with high peak rates. The TOU strategy works best where the price spread between peak and off-peak is largest and where cooling represents the biggest portion of the electricity bill. Southern California, Arizona, Nevada, and parts of Texas combine high cooling demand with aggressive TOU rate structures, making this strategy especially effective.

Homes with electric heating. Gas heating costs are not affected by TOU electricity rates, so TOU optimization for heating only benefits homes that use electric furnaces, heat pumps, or electric baseboard heat. Heat pump homes benefit the most because heat pump operation is efficient enough that pre-heating with off-peak electricity creates a meaningful cost advantage over running the heat pump during peak hours.

Tips for Maximizing TOU Savings

Know your exact rate schedule. Contact your utility or check their website for the precise hours of each rate tier. Set your smart thermostat schedule to begin pre-conditioning one to two hours before the peak window opens, so the house is fully conditioned by the time rates increase.

Do not over-pre-cool or over-pre-heat. Cooling the house to 68 degrees before a peak window when your comfort setpoint is 75 degrees wastes energy and money. The system works hardest and least efficiently at the extremes. A pre-cooling target of 2 to 4 degrees below your comfort setpoint is usually the sweet spot that provides enough thermal buffer without excessive energy use.

Seal air leaks before relying on pre-conditioning. If your home has significant air leaks around windows, doors, or ductwork, the pre-conditioned temperature will dissipate quickly, reducing the effectiveness of the TOU strategy. Basic air sealing ($200 to $500 for a DIY project or $500 to $1,500 professionally) improves both the TOU strategy and overall energy efficiency.

Consider ceiling fans during peak hours. Ceiling fans use minimal electricity (30 to 80 watts compared to 3,000 to 5,000 watts for central AC) and can extend the comfort window during peak hours by creating airflow that makes higher temperatures feel acceptable. Running ceiling fans while the thermostat is in coast mode can add one to two hours of comfort before the AC needs to cycle on during peak.

Monitor and adjust over the first billing cycle. After enabling TOU optimization, compare your first TOU bill to previous flat-rate bills. If the savings are minimal or negative, adjust the pre-conditioning window, the temperature offset, or consider whether your home's insulation supports the strategy effectively.