Agile pricing explained
13th February 2019
Customers on Agile Octopus are early adopters of the next generation of smart energy. Right at the forefront of time-of-use, dynamic pricing, Agile is in fact, a bit of an experiment to see if customer habits can be shifted based on fluctuating prices – a surefire way to our low-carbon future.
We’re keeping a close eye on Agile’s pricing, and the customers’ experience on the tariff too. We even have a forum where I and my colleague David Sykes, Octopus’ Head of Data Science, field customer questions.
We wanted to share one of the most common areas of discussion on the forum: the model behind Agile pricing.
First, a little background.
We launched Agile Octopus to encourage households to shift their consumption from the daily peak energy demand period of 4.00pm to 7.00pm when we’re paying very high wholesale prices. Customers avoiding this peak means we’re able to pass on significant savings when our wholesale costs are low and even pass on negative costs (i.e. we pay you to use energy) as happened on the 8th December 2018 when wind generation was very high.
But Agile has never never been done before, and that’s because of the complexities involved in energy pricing. We’ve broken down the pricing model below.
We wanted to 1) keep energy transparent by reflecting the complete cost-breakdown involved and 2) make Agile simple for customer useability. Balancing these two key things, an example Agile price algorithm is:
min(2.20 x W + P, 33.33)
In this equation,
- 2.20 is a coefficient that includes our distribution costs, which varies based on where you are in Britain;
- W is the wholesale cost of electricity for that period in pence per kilowatt-hour (p/kWh);
- P is the peak-time premium, and has a value of 12.00 between 4pm and 7pm but is zero otherwise.
- 33.33 is chosen to ensure the price is capped at 35p/kWh once VAT is added.
In this example…
the Agile price is 2.2 times the wholesale price of energy and between 4.00pm and 7.00pm an additional 12 pence per kWh is included (but capped at 35 pence, come what may).
There’re a few common questions this often prompts:
Why is there a 12p penalty at the peak period? Why is there a 35p cap? How well does Agile reflect renewable supply?
To understand that, we need to look at what makes up our costs. These are surprisingly complex and made up of a range of variables...
- Wholesale – the wholesale price of energy can vary heaps, ranging from low negative numbers (when generation is really high, and demand is low) to over 100p/kWh. Typically, in winter, it’ll be around 5 p/kWh overnight and 9 p/kWh in peak)
- Transmission costs (TNUoS) – this depends on your region but can range from 2p/kWh to 7p/kWh and is only applicable for usage in peak periods (4-7pm). It’s more expensive in the South, generally, because of the North-to-South transmission direction (i.e. there’s more energy generation in the North and demand in the South).
- Balancing costs (BSUoS) – typically around 0.2p/kWh and is quite volatile. More expensive at night when the sparsity of demand and generation on the grid means more balancing actions are required (this is probably a gross simplification for anyone who’s worked in the National Grid control room)
- Distribution costs (DUoS) – these are priced in blocks, and generally around 10-15p / kWh in peak and close to zero off-peak. For a non-half-hourly (standard, single rate) tariff, there’s a flat distribution rate.
- Capacity Market – currently this cost is under legal review but can work out at around 5-10p/kWh for winter peak usage (4-7pm weekdays between Nov and Feb)
- Renewable Obligations – flat fee of around 2 p/kWh
- Feed-in Tariff – flat fee of around 0.5 p/kWh
- Contract for Difference – varies daily but typically around 3-5p/kWh
To revisit the question – why is there a 12p penalty at the peak 4-7pm period?
If you add up the peak costs outlined above that we have to pay (TNUoS, DUoS, and Capacity market) it’s actually higher than 12 pence. Although in part this is compensated for by the 2.20 multiplier. The challenge for us is deciding that multiplication factor for the whole day and the additive element to cover the peak period extra costs we have to pay.
Why is Agile’s unit rate capped at 35p / kWh?
Most flat rate tariffs (fair ones, anyway) don’t sit higher than 18p/kWh, so a 35p cap may sound high in comparison. BUT: our wholesale costs can exceed 100p /kWh in peak periods. If we exposed the full peak wholesale cost in Agile’s pricing, the peak rates would get totally extortionate for a domestic customer.
A completely flat rate tariff aims to average out the whole day variability of all the different charges, but with Agile we can’t do that. To avoid issues we set a cap at 35 pence.
What else could we have factored in?
There are a few elements that aren’t reflected in Agile’s pricing, for the sake of simplicity, like the regional difference in transportation costs (TNUoS) and seasonal difference between winter and summer. These factors – particularly regional variation – we may work into Agile’s pricing as we learn more from customers and refine the algorithm.
This really illustrates the challenge with a tariff like this (and why no one’s had the resource or wherewithal to try it before now) – you have to strike a balance between simplicity for the sake of usability, and ensuring the prices are as reflective of the highly complex and diverse costs involved as possible.
Carbon Intensity data
With the cost made up so many complex factors already, Agile pricing isn’t as officially tied to the ‘greenness’ of energy as we’d like. Given that we designed Agile Octopus to encourage energy use at times with there’s low demand, and the stuff being produced is mostly green, we’ll definitely look to factor in National Grid Carbon Intensity data to more closely track renewable supply. The low Agile price periods do generally coincide with high renewable energy generation - the example of negative rates on the 8th December 2018 for example was a very windy day and again in the early hours of the 27th January 2019 wind was high and the Agile price dropped below 1.5p/kWh.
The real drive for Agile is using price to help change behaviour. You need only look at the effectiveness of Uber’s surge pricing model to see how dynamic, capacity-based pricing can be used to effectively control supply and demand. Similarly our own Agile report showed significant impact too.
As Agile is designed to get closer to reflecting the truly dynamic costs of energy - and seeing how users respond - the formula exaggerates the difference in the costs *we* face (ie peaks are disproportionately high; and cheap periods are disproportionately cheap). This is because we are trying to reflect the realities of the physics of the system - but there are many subjective questions, such as how fixed costs are shared, or whether peak costs should be borne by the marginal user, etc. We do this because we want Agile, and reactions to it, to inform changes to the way we (and other companies) pay for access to networks and the grid.
As a result, Agile may be a big lossmaker for us, or may be excessively profitable. It's brand new, and pretty experimental, so we might amend the formula or introduce new variables into the mix, but will of course give plenty of notice should that happen. Agile is exciting because it's really paving the way to the energy system of the future and we, and the customers who use it, are part of that experiment.
Already a customer and want to get Agile? Email us.
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