TUME Insights

Domestic Time-of-Use Tariffs - what's changed since 1978?
Published by Paul Coster | 8th July 2020

As insiders know, time-of-use (ToU) tariffs aren’t a new concept to the UK electricity industry. They have been available to consumers for over 40 years. The most common domestic tariffs have a fixed rate (p/kWh) at all times of the day, whereas ToU tariffs have rates that can change within-day (e.g. higher rate in the evening, lower rate overnight).

ToU tariffs incentivise people to use less energy during the morning and evening ‘peaks’, encouraging us to ‘flatten the curve’. Lower peaks means the industry can reduce or delay peak infrastructure investment (e.g. new gas-fired power generation), while off-peak consumption benefits renewables (e.g. wind and solar generation, which can’t be turned on and off at any time of the day). The result is a lowering of our electricity bills and carbon emissions.

Suppliers are starting to promote domestic ToU tariffs more, largely due to the roll-out of smart meters and adoption of electric vehicles (EVs). But what has changed, and could we be reaching a tipping point for their uptake?

Currently, most time-of-use tariffs use Economy 7 meters (est. 1978)

Before explaining what has changed for ToU tariffs, it’s important to provide some background. ToU tariffs require three key ingredients to be effective: 

1. Measurement of electricity usage over short, within-day time periods

2. Flexible demand that can consume electricity off-peak (e.g. storage heaters)

3. Systems to support financial risk management and settlement (i.e. buyers and sellers are correctly exposed)

In the UK, these ingredients were first in place in 1978 when Economy 7 electricity meters were introduced to support overnight generation (e.g. nuclear generation). These meters can measure usage over two periods of the day, including a 7 hour period overnight (hence the name ‘Economy 7’). Consumers were encouraged to install and use electric storage heaters for off-peak consumption, and charged at two static rates – a high day rate and a low night rate – encouraging overnight usage.

Moving forward to 2020, electric storage isn’t common. Most homes and businesses use gas for heating and hot water, so Economy 7 ToU tariffs are much less popular. In many ways we’ve gone backwards as our reliance on fossil fuel has increased.

To understand what has changed since the first Economy 7 meters, we looked at the various domestic ToU tariffs available from the UK’s 12 large suppliers. We also looked specifically at ‘EV branded tariffs’.

At the time of writing this article, almost all of the ToU tariffs on offer have two fixed day/night rates. The EV branded tariffs also have the same rate structure, which essentially makes these Economy 7 tariffs from 1978. So not much has changed, yet.

Smart meters and EVs to the rescue?

Consumers have generally been moving away from Economy 7, but there are two other trends working in favour of ToU tariffs: smart meters and EVs. Smart meters can provide ToU measurement, and EVs provide flexible demand that can consume off-peak electricity (e.g. overnight charging).

In 2010, the UK Government announced £13bn plans to roll-out smart meters by 2020 in the hope of delivering a high tech, low cost, low emissions energy system. In the last 8 years or so there have been ~11 million domestic electricity smart meters installed (or about 40% of ~27 million meters). Last year the roll-out deadline was pushed back to 2024, however installation rates were steadily improving prior to Covid-19.

Smart meters measure consumption every half hour, enabling tariffs that have more than two static rates, or even dynamic rates, within-day. The chart below illustrates the nature of some common ToU tariffs over a day, and shows how consumption is discouraged over the evening peak (from 4–7pm ish).

In addition to smart meters, the UK Government has been gradually encouraging the uptake of EVs. EVs benefit from tax breaks and zero congestion charges, and the government plans to ban the sale of new petrol and diesel cars from 2035 (brought forward from 2040). In the UK there’s currently ~200,000 EVs, and National Grid estimates an increase to between 3 and 11 million by 2030. That’s a lot of potential for flexible charging.

Smart time-of-use tariffs and technologies are slowly entering the market

The introduction of smart meters has resulted in just a few notable exceptions to Economy 7 ToU tariffs:

  • Tide by Green Energy UK (released Jan 2017, discontinued)
  • Agile Octopus by Octopus Energy (released Feb 2018)
  • Economy 24 by Social Energy (released Jun 2019)

 

Tide was the UK’s first smart ToU tariff. It featured three rates, including very low prices overnight (23:00 to 06:00) and a high price during the evening peak (16:00 to 19:00). The tariff was discontinued by Green Energy, presumably due to a lack of uptake and/or billing complexities.

Agile Octopus is a dynamic rate ToU tariff where the energy portion of the bill varies with market prices and the non-energy portion is fixed (e.g. electricity network costs, costs to balance supply and demand, renewable subsidies). Currently energy costs make up ~35% of a consumer’s bill, which is gradually falling as non-energy costs rise. Notably, they recently offered to pay customers to use electricity on a Sunday afternoon in May, coinciding with high renewable generation and low demand. Octopus is the most visible supplier in smart ToU tariffs; they also offer a dynamic rate export tariff, Outgoing Octopus, and an EV tariff, Octopus Go.

Economy 24 is a single rate tariff, however Social Energy controls a battery installed in your home to avoid consumption at peak time. Social then passes on a share of the savings via a tariff discount. An example of flexible demand-side response (DSR) tech, it relies on half-hourly measurement and price signals but relieves consumers from the burden of behaviour change.

In the next few years, expect more ‘EV tariffs’ and uptake of flexible demand-side technology

So, why has there been so little traction in smart ToU tariffs, and what can we expect as the domestic smart meter rollout nears completion in 2024 (or thereabouts)?

To quickly recap, there are three key ingredients needed to support smart ToU tariffs and tech: measurement in half-hourly periods, flexible demand, market and billing systems.

Smart meters provide suppliers with the measurement (half hourly data) required for smart ToU tariffs, and the UK roll-out was gaining pace. Despite this, ~60% of domestic consumers still don’t have a smart meter.

EVs are a rapidly growing form of flexible demand, and provide owners with a strong incentive to ‘fill up’ their car when prices are lowest. However, there are relatively few EVs in the UK. For those without EVs (or another flexible asset), there is currently limited financial benefit to adopt a smart ToU tariff. Even when the flexible demand is available, technology and automation needs to make it simple for consumers to see the benefits.

Trading and billing systems to support ToU tariffs are common for business customers, but remain immature for domestic consumers (regulators and suppliers have been waiting for the first two ingredients, presumably). Billing customers on smart ToU tariffs requires half-hourly (HH) pricing and settlement, which will be challenging for most large suppliers who have legacy systems. Obvious exceptions appear to be Octopus and OVO’s new proprietary systems, Kraken and Kaizen. Most other challenger suppliers use third party billing systems, which may or may not be able to process half-hourly data. Additionally, new pricing and risk management processes also need to be put in place to support such products.

Due to these issues, there may not be widespread adoption of ToU tariffs over the next few years. However, it is fair to expect more EV tariffs, beta ToU tariffs from tech-led suppliers, and increasing uptake of flexible demand-side tech that benefits from half-hourly price signals (e.g. solar plus battery storage, vehicle-to-grid, electric hot water and heating).

Over the coming decades, time-of-use can help us reach net-zero

We have an urgent need to transition to low carbon lifestyles by using less energy and prioritising renewables. The UK government has committed to net-zero greenhouse gas emissions by 2050 so we can expect new regulations encouraging consumers to reduce their carbon emissions.

Domestic ToU tariffs and the half-hourly price signals underpinning these tariffs inventise the right behaviours. These signals encourage use of renewable generation and flexible demand-side tech, and reduce the need for gas-fired ‘peaking’ generation. But signals and markets alone aren’t sufficient, we also need bold regulation.

Let’s hope the pace of regulation and innovation increases. Never mind electricity tariffs, our climate is experiencing irreversible change.

Paul Coster is an independent consultant and technology entrepreneur with over 12 years of experience at electricity companies in the United Kingdom (UK), New Zealand and Australia. He has worked a variety of roles across generation, transmission and supply. Paul is expert in structuring and pricing electricity supply contracts for large businesses customers, integrating new technologies and establishing new processes. He worked for the first UK company to actively combine DSR and supply, Tempus Energy. More recently he has started his own digital technology and consultancy businesses. Paul has been a TUME Associate since April 2020.

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