Time and tide wait for no man (or Ofgem)

Time and tide wait for no man (or Ofgem)

There has been a lot of coverage this week about Green Energy UK’s new Tide tariff, reported as being the first smart meter Time of Use tariff for domestic consumers. Launched without waiting for Ofgem’s consultation on Mandatory Half-Hourly Settlement to close on Friday 6th January, the tariff charges only…

There has been a lot of coverage this week about Green Energy UK’s new Tide tariff, reported as being the first smart meter Time of Use tariff for domestic consumers.

Launched without waiting for Ofgem’s consultation on Mandatory Half-Hourly Settlement to close on Friday 6th January, the tariff charges only 4.99p/kWh for overnight consumption, but 24.99p/kWh for consumption during weekday evenings, and 11.99p/kWh at all other times. The tariff requires consumers to have a smart meter installed.

The smart meter programme has two main benefits – an end to estimated bills, and enabling tariffs that more accurately reflect system costs. Ofgem aims to enable elective half-hourly settlement in early 2017, and when suppliers are charged based on half-hourly wholesale and network prices, they bear higher risks when they offer consumers a flat tariff.

The media reacts with claims of market manipulation or failure whenever prices spike for a few half-hour periods of extreme market tightness. Both the high prices at these times and low prices at others do reflect the strain on the system at the time. Suppliers have to manage volatile market prices, and if they cannot do so with generation, it makes sense for them to attract customers with lower consumption at times more likely to see system tightness.

However, given the low levels of engagement with an already complex energy market, this tariff is only likely to be attractive to those most engaged with the market who are likely to be active switchers and on a market-leading tariff.

Our analysis using standard profiles shows that for the average domestic consumer, the total cost of this tariff is around 15p/kWh. This is in line with the typical Big 6 tariff, and is not competitive with the best rates available in the market from new entrants. For an Economy 7 profile, the rate drops to 14p/kWh, which is competitive with Economy 7 tariffs.

For a typical consumer with average consumption to benefit from this tariff, their evening consumption would have to be half that of the average profile, with the difference reflected in higher night time use. This may be appropriate to a city professional who returns home after 7pm, or an electric vehicle owner who charges overnight, but is likely to be more expensive for families. While appliances increasingly have integrated controls and connectivity, flexibility of domestic demand has limits and requires substantial behaviour change.

Tariffs that reflect time of use costs for business consumers have contributed to peak demand falling by around 10GW over the last decade. If domestic consumers engage with these tariffs, the trend of declining demand is likely to continue, and reduce the needed investment in generation capacity. It may also incentivise domestic storage, especially for those with solar panels.

The direction of travel in the energy market is towards a smarter, more flexible market where consumer prices more accurately reflect costs. This is recognised in a new report from Citizen’s Advice, where three trends – New pricing models, Re-allocation of network costs and Widespread adoption of storage – will result in a fourth – increased Intermediation of energy retail – to help consumers understand the increasing complexity.

This tariff is an interesting first foray into this brave new world, but is unlikely to be anything more than a niche product. Green Energy UK will need to sharpen their rates if they are to attract the engaged customers most likely to have an interest.

Utilitywise

Posted by on Thursday, the 5. January at 16.47

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