Designing creative electricity tariffs

Background

In the UK, the majority of domestic electricity customers are on a standard variable tariffs: a contract which the customer can leave any time, with a single price for electricity used any time of day, which the utility can increase with 30 days notice.

The Cost of Electricity Supply

Before we consider how to structure tariffs, it is worth taking a moment to understand how electricity suppliers pay for the electricity their customers use. After all, whatever tariff a supplier sets must aim to cover these costs (plus leave some margin for profit).

The ‘Purest’ Tariff

The purest tariff I can think of involves just charging the customer based on their half hourly consumption, at the system price, plus passing through the various other costs, and adding a small profit margin. This eliminates the need for the supplier to forecast consumption and hedge. A second advantage of this tariff would be that it would send a strong incentive to the customer to use less when the price was highest, reducing their average price.

Thoughts on fixed contracts

In many financial markets (for example mortgages) there are two distinct forms of contract: fixed and floating. The floating, or flexible, version fluctuates freely, ideally such that the contract could be ended at any time without either party being worse off. The fixed version would, on the other hand, generally leave one party worse off if the contract was ended early, often requiring fair compensation.

Static Time of Use tariffs

Economy 7 has been around for a long time, and in recent years other suppliers have tried other time-of-use tariffs. Bulb Energy have a smart tariff which charges a high price from 4–7pm, and a lower price the rest of the day. Octopus Energy have a range of tariffs aimed at EV owners, called Go Faster, that allow them 3, 4 or 5 hours of very cheap electricity and a higher price the rest of the time (though even the peak price on Go Faster is often cheaper than most standard contracts).

Reducing Tariff Uncertainty

One of the key concerns with a tariff like Agile is that it leaves customers exposed to a lot of uncertainty. Prices can spike for certain half hours. The whole day can be much higher than expected. And prices can gradually increase over time. Many customers would be willing to pay a premium in order to reduce their uncertainty.

Appliance Specific Tariffs

One area where I think there is considerable potential is for customers to be offered a tariff for the electricity consumption from a specific appliance. For example, you could be offered a lower tariff for any electricity consumed by your electric vehicle, which could be assumed to primarily be used overnight, and a regular tariff for the rest of your consumption.

Combining Import with Export

So far I have just been talking about buying electricity from the grid, however customers with PV (solar panels) and batteries may also export to the grid. In future there will also the potential to discharge from your car’s battery (Vehicle 2 Grid), which may sometimes be worthwhile.

Conclusion

To wrap up what has ended up being a long post, I expect there to be substantial changes to electricity tariffs in future.

Fascinated by what makes societies and markets work, especially in sustainable energy. http://guylipman.com.

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