Time Of Use Tariffs will transform the energy market

Since the electricity market was first established in the UK over 100 years ago customers have come to expect that they will pay a set price for their electricity regardless of the time of the day or the month of the year. This is all set to change over the next ten years with the introduction of Time of Use Tariffs.

At present, most homes in England pay a single rate for their energy regardless of whether they are using it in the day or during the night, in the week or over the weekend.

Consumers are charged a fixed amount (currently about 16p) for each kilowatt hour of electricity they use, in addition to a daily standing charge of around 25p.

This is despite the fact that electricity demand varies greatly depending on the time of day, or the day of the week, or the month of the year.

The first Time of Use Tariffs: Economy 7 and the birth of ‘off-peak’ hours

Time of Use Tariffs are nothing new. They have existed in the UK since the 1970s when Economy 7 tariffs were first introduced as a solution to using the excess and unused electricity produced from nuclear power stations during ‘off-peak’ hours between midnight and 7am.

(Nuclear power stations generate a consistent base-load of energy and cannot be adjusted up or down in relation to consumer demand).

Economy 7 tariffs are only available to properties that have a special Economy 7 meter fitted. These properties are typically not connected to the gas network, and get their heating from electrically charged night-storage heaters.

These work by charging up overnight and then releasing heat as required throughout the day.

Why the renewable energy transition will usher in the age of Time of Use Tariffs

The increasing proliferation of renewable energy sources throughout the UK also means that in the near future, the price of electricity will vary throughout the day depending on the level of available electricity at any one time.

There are already some tariffs available on the UK market offering customers a financial incentive to use electricity outside of the peak hours of 4pm – 7pm. The most well known example being the ‘Agile Tariff‘ from Octopus energy.

Under the simple economics of supply and demand, the cost of electricity will become cheaper during times of abundant supply and low demand, and more expensive when demand is high but supply is low.

When considering solar power for example, there is often a mismatch between the times of the day when solar generation is at its peak and the times of day when there is a high demand for electricity (see Graph A).

Graph A: Solar power generation peaks around midday when many homeowners are away at work and therefore not in a position to make use of the energy their solar panels are generating. Energy demand in the home is usually at its height in the morning and in the evening.

Here are some examples of how time of use tariffs could affect energy prices in real-life scenarios:

LOW PRICE – 3pm on a sunny weekday

Demand is low at this time as this is between meals and is typically a sunnier time of day. However, we can expect solar power generation to be abundant as the sun is high in the sky and near peak strength.

As demand is low but power is plentiful, we would expect prices to fall in order to incentivise people to use the solar electricity that is being generated. This could include energy-intensive activities involved with business or in the home such as using the washing machine.

HIGH PRICE – 7pm on an overcast day

Demand is high at this time as people have returned home from work so may turn the heating on and will be starting to cook dinner and use other household appliances. However, solar power generation will be low at this time as the sun will be setting.

As demand is high but power is scarce, we would expect prices to rise to disincentivise people from performing energy-intensive activities.

The idea behind Time of Use Tariffs is to incentivise energy customers to shift their consumption behaviour in order to consume less energy when costs are high, and save high consumption activities (laundry, dish-washer, etc) for times when prices are at their cheapest (see Graph B).

time of use tariff - energy costs v energy usage 2
Graph B: With Time of Use Tariffs energy prices will fluctuate throughout the day in correlation with energy demand and the amount of energy that is available

Time of Use Tariffs, Smart Meters, and the ‘Internet of Things’

The UK Government has been encouraging the uptake of smart meters across the country under the message that consumers will no longer get estimated bills, and can monitor their energy use via an In Home Display.

Whilst these are both good things, smart meters will really come into their own with the introduction of Time Of Time Use Tariffs.

By combining smart meters with devices and white goods that are connected through Bluetooth or the internet, homeowners who have a time of use tariff will be able to programme their appliances to operate only when electricity prices fall below a certain threshold.

This will mean that consumers will save money whilst only drawing electricity at times of abundance. The ability to choose to use electricity only at times when it is cheapest will be a tremendous value to owners of electric vehicles and battery storage technologies.

Negative pricing

There will be times when there is so much renewable electricity being generated that is cannot all be used and may threaten to overwhelm the electricity network.

On these occasions, electricity prices may become so low that they actually become negative. This means that energy users would effectively be paid to take the excessive amount of electricity off of the grid in order to prevent stress on the network.

This presents a very attractive potential revenue source for owners of battery storage systems and electric vehicles.

While this may seem like an unlikely eventuality, it has already been happening in Germany from as far back as 2017.

In the UK, the Octopus Agile tariff previously mentioned also rewards energy customers who are able to take excess energy off of the grid during times of stress.

Time of Use Tariffs and battery storage systems

Homeowners who have battery storage can take advantage of Time of Use Tariffs by programming their battery to charge at times when there is lots of renewable energy being generated and when energy prices are at their lowest (see Graph C). They can then use this energy at a later time when energy generation is lower and electricity prices are high.

In this way, even without solar panels, customers who have a battery installed can save money by avoiding purchasing energy from their supplier when costs are at their highest.

time of use tariff - solar generation v battery charge
Graph C: Owners of battery storage technologies will be able to charge their batteries during the day when solar generation is at its peak and when energy prices are lower

Having energy storage technology means that energy can be purchased at a low price (by charging the battery) then stored for use at a time when electricity is more expensive (i.e. in the evening).

This stored electricity can be used in order to minimise energy costs at a time when energy prices are high and there is a high demand within the household (see Graph D).

Graph D: Electricity stored in a battery can be used for times when it would otherwise be expensive to purchase electricity from a supplier

Alternatively, the user may decide to sell the electricity stored in the battery to the national grid when electricity demand is greater and energy prices are higher (see Graph E).

Graph E: Electricity stored in a battery can be discharged and sold back to the grid when energy prices are at a peak

These technologies will give consumers more control over the way that they engage with their energy supplier, by giving them access to the energy market. No longer will they simply consume energy, they can produce and trade it through microgrids, leading some industry experts to refer to the emergence of a new kind of actor in the energy market – the ‘prosumer’.

So that energy users can plan for the days and weeks ahead, we can expect to see an increasing use of ‘Big Data’ analysis coupled with weather forecasting to accurately predict times of electricity scarcity and abundance.

This will give energy consumers the confidence to decide when is the most cost-effective time to use, store, purchase, or sell electricity.

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