Reforming Final Consumption Levies is essential to scaling domestic flexibility

As we embrace electric alternatives to gas boilers and gasoline cars, the electricity demand is growing and becoming ‘peakier’. Flexibility is all about shifting and spreading energy peaks to match times where renewables are generating electricity. The potential annual savings from consumer flex could reach over £4.6bn by 2030, saving 14% from everyone’s electricity bill. In this year alone, there were 135 hours where renewable generation was in surplus, and this is expected to rise to 50% of the time by 2035. During these times, wind farms are often paid to shut down to prevent grid overload.

Rather than letting those valuable green electrons go to waste, we believe in tapping into household flexibility to make the most of them.

We have experimented with making electricity free to consumers during times of surplus. Firstly, two schemes in collaboration with UK Power Networks and National Grid’s NESO targeting specific network hotspots of renewable curtailment. Customers proved highly responsive to our Power-ups sessions, see graph, and participants have saved £100/year on average.

Then this summer we started offering 1 hour Free Electricity Sessions nationally in response to drops in the wholesale electricity price. In just five weeks, 750k+ customers signed up to this product and as a collective, customers turned up by over 2.2GWh across 6 sessions.

Looking at the graph above, it’s clear that there’s a vast amount of flexibility to the households’ consumption. It also appears that customers find new ways to use that free electricity rather than purely shift their usage from other times. This doesn’t mean energy is wasted; using free energy to do something extra, like baking a cake or heating your home more, still boosts the consumer's welfare and well-being. We also observed some energy shifting between days (charging EVs, washing or batch cooking). With electricity prices rising again, it is absolutely essential consumers can benefit from cheap electricity when it is abundant, but existing policy doesn’t support this.

Even at times when it’s so windy and sunny that wholesale prices turn negative, letting our customers benefit from this comes as a cost to us as a supplier.

The retail cost of electricity (i.e. the price we face as a supplier) is more than just the wholesale price, it’s also network charges and Final Consumption Levies (FCLs). These recover costs from support schemes, such as subsidy for renewables and apply to electricity imports only. Together, these charges cost around 6p/kWh off peak and are even higher at peak time. FCLs account for about a third of the retail price of electricity, and these costs are expected to rise in the coming years.

Recovering these costs via the electricity bill is problematic, because it 1) makes electrification more expensive; and 2) distorts incentives for consumer flexibility.

FCLs essentially increase the cost of electricity because they are charged on a volumetric basis (i.e. p/kWh). This means they distort the true cost of electricity and prevent actions that are in the system's best interest - and prevent customers from being able to benefit from cheaper energy.

FCLs also have a specifically negative impact for home batteries and vehicle-to-grid; as FCLs are charged on import only, the consumer has to pay FCLs for electricity going into the battery, but doesn’t get this refunded when that same electricity is exported to the grid later, while another consumer offtaking the electricity from the battery again has to pay for FCLs. We have covered this in more detail here.

Octopus advocates for the removal of FCLs distorting impact on flexible consumption. We’ve seen from Power-Ups and Free Electricity Sessions that customers are ready to respond to market signals. Without FCLs, all suppliers would be incentivised to pass on negative wholesale prices and we’d see more innovative customer offerings, especially, if coupled with the introduction of locational wholesale prices. The tools we need to stimulate customer flexibility already exist, the focus now should be on sharpening market signals and removing the barriers so consumers can respond efficiently to them.