Update: Four years on, the first Time of Use tariff has now been introduced. Read about it here.
Ahead of our launch of the smart grid section on TheGreenAge, I thought I would open with a blog about Time of use tariffs – which in the next decade may become the norm for homes in the UK.
Our current electricity tariff structure
On the whole, the majority of people pay a set price for each kWh of electricity they use as well as paying a standing charge (a daily charge for having an electricity supply in home). This keeps things nice and simple for consumers (despite the number of different tariffs available) since you know that the more electricity you use the more you are going to pay.
Some people have Economy 7 (or Economy 9) energy meters in their homes and this allows them to pay two different prices for electricity – cheaper electricity in the middle of the night, but then they pay a slight premium during the daytime.
The reason for energy companies offering two tier tariff is that nuclear and coal power plants don’t get turned off during the night, so they produce power which needs to be used – so they sell it at about half price (6-7p / kWh) to try and drive demand.
The rollout of smart meters
By 2020, the Government want 80% of UK households to have had smart meters installed. The smart meter rollout is absolutely key to the smart grid, which is just about the biggest change to the energy network since its inception.
You can read more about the smart grid here.
One of the features of a smart meter is that it allows two-way dialogue between the household and the energy supplier. So not only can electricity be transmitted from the grid into the home, but also it allows the energy companies to see real-time energy usage.
The advantage of this 2-way dialog for the consumer is that it means the end of estimated energy bills – you are only charged for exactly what you use.
However the ability for the energy companies to see exactly what energy demand is across the network opens up a very interesting possibility – the time of use tariff.
What is the Time of Use tariff?
The time of use tariff would allow energy companies to charge different amounts for electricity depending on the time of day. This is absolutely key for the energy companies since it would allow them to suppress demand during typical peak demand times and encourage usage when energy usage is typically very low.
The benefit of the time of use tariff for the energy company is that they can then avoid building very costly power plants. By suppressing peak demand, peak supply can also be lower – and in theory these savings can be passed on to consumers.
Time of Use tariff – a worked example
So let me show you what this means by way of an example.
At the moment, the price for 1 kWh of electricity is about £0.15, so regardless of whether you use that unit at 11am or 6pm you are paying the same amount.
At about 6pm, everyone comes home from work / school and so typically that is the moment when peak electricity demand occurs. Everyone turns on lights, appliances and their heating. Now imagine if at the moment electricity was £0.30 per kWh, but at 11am it was £0.08. If you continued to act normally your bills would obviously go up, however you could in theory use the minimum energy possible at this peak time when electricity is most expensive and try and do some jobs when you can pay the least (at off peak times) – for example set the washing machine / dishwasher to start on then. This would allow you to pay less on your energy bills.
This time of use pricing (sometimes referred to as time of day pricing) could become the norm when smart meters are rolled out across the country.
Now paying a different price depending on what time you use electricity in the home obviously complicates an already confusing consumer energy market with lots of different providers offering different prices. However for the energy supplier the benefits are clear and also for the consumer, provided they change their energy usage behaviour to use less energy at peak times then there are savings available there too.
Some final thoughts on the Time of use tariff
Obviously between now and the rollout of the smart grid (and therefore the smart meters), it is pretty likely energy prices will have gone up. Over the last 8 years energy prices have gone up on average 8-10% a year, so in a real cash terms basis we are now paying twice as much for electricity as we did in 2005.
We have all seen the backlash to the recently announced energy price hikes by 4 of the big 6 energy suppliers, so obviously energy prices are already genuinely hurting peoples finances – therefore as these prices continue to go up, consumers will take an even bigger interest in energy and energy efficiency. I think as they do this, they will begin to understand more how the energy sector operates and will be more aware of the daily energy demand cycle – so they will know that in the middle of the night energy is cheaper than first thing in the morning or at 6pm.
This should mean that people get to grips with the implementation of the time of use tariffs. For most people it is not going to be an exact science, but if they know generally that electricity is most expensive during the evening hours, they hopefully will start to use energy in a cheaper way (i.e. at offpeak times).