Time-of-use energy tariffs

Learn more about gas and electricity settlement reform and how smart meters could help pave the way for true time-of-use energy tariffs.

Key points

  • Time-of-use tariffs could match a customer's energy usage to the price they pay, meaning consumption at off-peak times could be cheaper
  • Despite the existence of tariffs such as Economy 7, there are practical problems related to electricity settlement and gas settlement that are hindering the development of more accurate time-of-use tariffs
  • Removing such barriers could benefit customers and help the industry by encouraging more off-peak use
  • Smart meters are seen as a key tool in the development of better time-of-use tariffs

The concept behind time-of-use energy tariffs is easy to grasp; as demand for gas and electricity fluctuates at different times of the day, customers may expect to see differences in the price they pay depending on the amount of energy they use at peak times.

Despite the popularity of certain tariffs such as Economy 7 and Economy 10, the emergence of true time-of-use measurement that would accurately reflect an individual user's usage has proved more elusive and has been hindered by a variety of practical problems.

"We're trying to avoid the old peaks of demand," said Sacha Deshmukh, chief executive of Smart Energy GB.

"We just don't have those big, old-fashioned coal-fired stations any more that could be turned on for those few occasions when there was lots of demand for electricity."

Dynamic tariffs have even been proposed, something that could see energy prices changing at any time with customers alerted by warnings such as text messages.

However, the general feeling would seem to be that fixed time-of-use tariffs are the most convenient for consumers and would be most likely to lead to the best savings; this could, for example, mean that power is cheaper during the night.

Energy settlement

Energy suppliers typically try to purchase the electricity and gas they expect their customers to consume in advance, a practice that helps the supplier manage price and volume risk.How to save money on energy

But gas and electricity usage is notoriously difficult to predict in real time.

Energy settlement is the phrase used to describe the system by which the differences between expectation and reality are ironed out and paid for.

In its March 2016 provisional decisions into the reform of the energy market, the Competition and Markets Authority (CMA) had "concerns that elements of the settlement systems of both gas and electricity lead to inaccuracies and delays that distort competition between energy suppliers".

Electricity settlement

Under the current system of electricity settlement, prices are based on consumption/demand in half-hour periods.

However, traditional electricity meters aren't capable of recording a user's half-hourly consumption; this is an area where it's hoped that smart meters will be able to help record usage more fairly and accurately.

In the meantime, domestic and microbusiness customers are assigned to one of eight profile classes, and there's no guarantee that the class they're placed in will match their actual energy use.

Did you know...?

  • Smart meters should help record customer usage in a more in-depth and accurate manner and speed up the process of reporting this usage back

The profile class is used to estimate consumption over time and allocate energy used to each half-hour period.

Customers are unlikely to know at what time of day energy is cheaper and - even if they did know this - there's currently no incentive for them to change their consumption pattern because the price they pay is based on their pre-defined profile class.

The CMA expressed concern that this system "fails to charge suppliers for the true cost of their customers' consumption" and also doesn't encourage suppliers to help consumers change their consumption pattern.

Furthermore, the Smart Energy Code currently prohibits suppliers from collecting consumption data on anything below a daily basis unless a customer has given explicit consent for the supplier to do so.

The CMA called this opt-in clause "a major barrier to the development of static and dynamic time-of-use tariffs" and recommended that the Department of Energy & Climate Change (DECC) should consult on amending the provisions of the Smart Energy Code.

The CMA also recommended that Ofgem should "conduct a full cost-benefit analysis of the move to mandatory half-hourly settlement and consider options for reducing the costs of elective half-hourly settlement".Small energy suppliers

It was further recommended that both the DECC and Ofgem should publish and consult jointly a plan setting out timescales and responsibilities relating to the introduction of half-hourly settlement.

The CMA suggested that, if these problems can be addressed, suppliers may be encouraged to bring in new products and services such as time-of-use tariffs, which reward customers for shifting consumption away from peak periods.

Gas settlement

According to the CMA, the current system of gas settlement "leads to an inefficient allocation of costs to parties and creates scope for gaming, which reduces the efficiency and, therefore, the competitiveness of domestic retail gas supply".

Project Nexus, a long-running plan to help reform gas settlement, is due to launch on 1 October, 2016.

Although the CMA noted that Project Nexus should solve some of the current inefficiencies, it also stated that "the gas settlement process would still be characterised by the presence of a (residual) amount of unidentified gas, inefficiencies in the allocation of the cost of this residual unidentified gas, as well as incentives that shippers face to place a higher priority on adjusting annual quantities down".

Cornwall's sunshine tariff

    In 2016, residents of the Cornwall town of Wadebridge were offered the opportunity of signing up to a so-called sunshine tariff.

    A lot of solar power is created in the area, so residents have been encouraged to try this tariff which charges a lower price for electricity in the day than in the night.

    Such innovative pricing models for energy are made possible by smart meters; the roll-out of these meters is likely to lead to more and more time-of-use tariffs.

The CMA has urged Ofgem to look into further reform of this area and is also looking to impose extra commitments on gas suppliers with regard to the regularity of their notification of meter readings to central gas data unit Xoserve.

It has been proposed that all meter readings for non-daily metered supply points in Great Britain must be sent to Xoserve as soon as they become available and at least once a year, except for smart meters where meter readings must be submitted monthly.

Smart meters

These problems in the administration of energy settlement are one of the reasons why the government has put such store in the ability of smart meters to help reform the UK's energy market.

They should help record customer usage in a more in-depth and accurate manner and speed up the process of reporting this usage back to the energy supplier, and then on to the regulating bodies that monitor the suppliers.

Smart meters should be installed in the vast majority of UK homes by 2020, but there have been criticisms of the functionality of some such meters, plus warnings that the installation timescale may slip.

In addition, some have questioned the very concept of smart meters, and the case for time-of-use tariffs which, for example, experienced very low levels of take-up when introduced in Australia.

"[The argument for smart meters] very much relies on behavioural change," said Stephen Thomas, Emeritus Professor of energy policy at the University of Greenwich.

"But that doesn't really address what smart meters are for, which is to smooth out peaks in demand. If I look at a smart meter in the middle of winter on the coldest day at six in the evening and I see I'm using a lot of energy, do I turn my heating off and have a salad instead of a warm meal?

"Think of a pensioner or vulnerable household looking at a smart meter at that time and being scared to death of not being able to pay the bill, so switching things off to the damage of their welfare.Green energy

"There's no intellectual case for smart meters unless you have time-of-day tariffs. That relates to electricity because electricity demand and supply have to match every second of every day.

"It doesn't apply to gas, and I've yet to hear any convincing argument why we need smart meters for gas, the pressure in the gas network can accommodate switches in demand and supply very happily."

Rosie McGlynn, director of new energy service at Energy UK, was keen to stress that time-of-use tariffs would be optional for customers:

"Things like Economy 7 have been in the market for a long time," she said. "[The new tariffs] won't be mandatory, it's up to each individual to have a conversation with their supplier about what tariff they want to be on."

By Sean Davies