Everyone’s a winner - why smart tariffs are good for all customers, even those not on them
We’re in the middle of a massive, system-wide transformation in energy. The change is crucial because the power sources we rely on are changing. Moving from “burning fossil fuels on demand” to “producing power according to when the sun’s shining and the wind’s blowing” means we need to look at new, creative ways to balance energy needs with generation to ensure our future electricity system remains safe and reliable.
Luckily, the green energy boom is perfectly coinciding with new, smarter uses for electricity - like heat pumps and electric cars - which unlock new opportunities to manage demand in line with renewable energy generation. So while it’s becoming harder to control supply, it’s getting ever easier to control demand intelligently.
That’s why to build the energy system of the future, how we think about the energy system - and what it needs - must be flipped on its head.
This transformation would put the customer in pole position to drive forward the energy transition: with smart tariffs that empower users to reduce their energy use at the dirtiest times and make the most of energy when it is cheap and green. Best of all — thanks to the ever-smarter technologies in our homes — they won’t even need to actively change behaviours. We can automate and optimise their use to give the customer the best price and balance the grid at the same time. This doesn’t just mean direct bill savings for the customer through cheaper off-peak prices and greener power: it also reduces GB-wide costs for investment in networks, generation and storage assets – all paid for by consumers.
With the cost of energy at an all time high and millions of households already struggling to pay their energy bill, there is rightly attention on the cost of the energy transition and who will pay for it. This blog explores two key topics:
- Why it is that everyone would benefit from smart tariffs: even if not everyone’s on them. Smart tariffs can help keep the cost of the energy transition affordable.
- How a growing number of households can benefit from smart products: not just the most tech-savvy early adopters. Massive large-scale uptake of the National Grid’s Demand Flexibility Service proves there’s a huge customer desire for opportunities to be rewarded for flexibility.
With thoughtful design we can build a carbon free energy system which works for both the fuel-poor and the asset rich. To keep the costs of the transition low for everyone, those who are able to shift load out of peak periods must be incentivised and rewarded for doing so - as the risk of not doing this is higher bills for everyone and slower progress towards Net Zero.
Without smart management, our growing energy needs will cost billions.
If we don’t intelligently manage EVs and heat pumps, National Grid ESO predicts EV charging and heating demand will need an additional 22GW of peak power by 2040. That’s the equivalent of nearly seven more Hinkley Point C’s - the 3.2 GW nuclear power station currently being built in Somerset, projected to cost in the range of £25-26 billion once complete.
Source: National Grid ESO Future Energy Scenarios 2022, Consumer Transformation Scenario. Note that flexible heating load includes storage heaters, Hybrid Heat Pumps, District Heat, and thermal storage.
And that’s not all. On top of the upfront costs for the generation capacity, expensive network infrastructure upgrades would be needed to transport the power from A to B.
That’s a whole lot of cost that could be saved simply by managing load more smartly to avoid consumption at peak periods.
Importantly, we will still see these benefits even if only a portion of demand shifts out of peak periods - highlighting that everyone will benefit even if only a portion of the market “opt ins” to smart tariffs under any future market design.
If households shifted their pattern of use to reduce peak demand by even 15GW by 2050, we could cut system costs by £40-50bn between 2021-2050 according to analysis undertaken by Ofgem and BEIS in 2022. A third of this is down to the reduced need for network reinforcements. The remaining savings would be made from not having to build and run generation and other alternative technologies to meet higher demand.
Not everyone needs to be on a smart tariff for everyone to benefit
If EV charging is not managed smartly then peak demand will be much higher in the future. The measure of peak demand is important as this is what drives investment in network and generation capacity, as well as socialised system costs.
We don’t need every domestic customer to shift load to reduce the peak by 15GW, but everyone would get the benefit of those £40-50bn in savings; through lower network and balancing charges that are recovered from all consumers. This highlights just how important it is to encourage consumers who can shift load out of peak periods to do so, as this will reduce total system costs which are shared amongst all end users. Our market arrangements need to encourage the most efficient use of network assets, rather than encouraging overbuild and overspend on generation and network assets.
Fixed price and ‘flat’ tariffs will remain a part of the future for many years to come, but we do expect the share of consumers on smart tariffs to increase with time, as more and more homes get Low Carbon Technologies (LCTs) like EVs and heat pumps, and smart meters and billing make potential cost savings even bigger.
Flexibility in all its forms
Of course, different customers will want different things from smart tariffs, and we are starting to see a number of tariffs in various different shapes and sizes come to market. And we’re exploring all sorts of flexible solutions to suit a wide range of customer types. Already in the market are “manual” solutions – where the supplier (or other party) asks customers directly to turn down in return for a reward, like in Saving Sessions. At the other end of the spectrum, technology allows suppliers to automate the use of smart devices (like EVs and batteries) allowing the customer to benefit from the cheapest power and earn revenue for supporting the grid.
This automated option is not “Tomorrow’s World”, it is already happening at scale. In March this year we were already controlling the charging of over 30 thousand electric vehicles through our Intelligent Octopus tariff which totals 200MW of electricity storage, the biggest distributed battery in Europe. We are seeing tremendous growth as customers recognise the value they can get. On Intelligent Octopus, we’re charging vehicles according to variable, and volatile wholesale prices but customers simply see a two rate tariff - with extremely low prices whenever Octopus smart charges their car.
Advances in technology are increasingly making it easier to access flexibility from consumers in ways that are far more convenient for them. Increasingly many suppliers are taking the risk of wholesale market exposure away from consumers in return for keeping some of the upside that comes from managing this load more smartly. While some customers might want complete exposure to wholesale prices, like those on Agile Octopus, increasingly suppliers are developing tariffs which shield consumers from the risk. Octopus Zero is a great example of this which guarantees zero energy bills for five years for new homes kitted out with the right combination of solar panels, home battery and heat pump. This is made possible through Kraken, our state of the art technology platform which can optimise the use of these assets without any need for customer action but within customer preferences.
Flexibility for all
Some argue that those who can’t afford Low Carbon Tech (EVs etc.) will miss out on the lower smart tariff prices and end up picking up the costs of a renewable system. This outcome would of course not be acceptable, and therefore ongoing policy attention is needed to determine who pays for the energy system - and to ensure costs don’t disproportionately fall on those least able to pay. Increasingly enablers for smart technologies fall outside the energy system - such as high speed broadband and mobile signals - meaning cross sector collaboration is fundamental to ensure equal access to products and opportunities for all consumers.
Firstly, there are increasing opportunities to auto-manage all sorts of technologies, not just the ones favoured by ‘early adopters’. Right now, we’re exploring ways to intelligently manage night storage heating, and share this value with consumers. Secondly, as we’ve already discussed in this piece, the opportunities to be rewarded for shifting demand are growing even without the need for any smart-enabled technology. Through ‘manual dispatch’ projects like Saving Sessions (part of the National Grid’s Demand Flexibility Service), customers can flex manually by changing normal household routines and earn money for doing so. All they’ll need is a smart meter - which everyone should have by 2025.
But perhaps more crucially, our mission to decarbonise heating is all about making heat pumps genuinely accessible and affordable to all. Households can install newly designed Octopus heat pumps at prices roughly equivalent to a typical gas boiler. When gas boilers need replacing, a heat pump is now a cost-effective, feasible option for almost every consumer. And we’re seeing social landlords starting to invest in heat pump solutions and zero bill homes too. A similar story is true for electric vehicles, where on top of electric vehicles becoming increasingly affordable as they hit the mainstream market, the second-hand market is growing year on year too - which offers a viable alternative, often half the cost of the cheapest new electric car.
The key gap which needs policy maker attention is the low income and cash poor home owner sector who without finance innovation will be the last to decarbonise their home heating and transport. We’re already seeing some progress here but more innovation is certainly needed to increase the reach of these solutions. We’ve partnered with Lloyds who are providing £1,000 towards an air or ground source heat pump for customers that have a mortgage out with them. And additionally they’re offering £500 for other eligible green home improvements!
Finally, it’s absolutely critical that all customers are supported in the energy transition and significant investment in deep retrofit solutions is fundamental to improve the energy efficiency of all homes, but most importantly low income households, who may have fewer other options to reduce their bills. Not only will this help customers save directly on their bills through reducing energy waste and therefore consumption, but it could also provide the tools for more people to provide flexibility and earn revenue for doing so - through access to optimising electric heating solutions.
Ultimately, domestic flexibility isn’t the preserve of the early adopter - innovation both within the energy sector and wider are making domestic flexibility, and associated revenue earning potential, mainstream and available for all. The 700,000 customer sign ups to Saving Sessions prove that customers are willing and ready to play their part. Greater cross sector collaboration is needed to ensure all consumers have equal access to the prerequisites to adopt smart, flexible technologies, however, this should not slow progress in encouraging those who are able to flex their demand to do so - as this will keep the costs of the transition lower for everyone.
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