Introduction
A number of industry players, for instance NG ESO, are calling for more widespread use of Time Of Use Tariffs (TOUTs) to optimise electricity demand on the grid. In many markets, price signals make markets overall more efficient. However, there is a real risk that in the UK energy markets, TOUTS will be used to clobber consumers with higher prices.
How do TOUTs Work in Other Markets?
A good example of TOUTs is Uber. At the end of a big event like a concert, there are many people who want to leave a venue at the same time so the demand for transport services goes up. At times like this Uber raises local prices. This effects both the demand and supply side. Demand reduces as some people decide to defer their journey by going to the pub for an hour or deciding to take the Tube or walk home instead of taking a taxi. Supply rises are drivers already active switch location to the source of demand and idle drivers get into their car after deciding higher prices makes it worth their while. Eventually, the market clears at a higher price and both demand and prices fall back to normal levels as the crowd clears.
How Will Domestic Electricity TOUTs Work?
It is proposed that each day is divided into time slots with different prices at different times of day. Smart meters will automatically record usage by the half-hour and charge different unit rates for each timeslot. In a way, this is a development of the old Economy 7 regime where consumers could charge up their storage heaters overnight on a cheap rate and release the heat during the day to keep their house warm. This sounds OK, until you think about it a little more deeply.
Consumers are being encouraged to switch to smart meters and the grid is moving towards a much higher penetration of intermittent renewables like wind and solar. The output from these generators is not controllable, except at times of very high generation and windfarms can be asked to turn off or curtail their output.
There will be high-demand, low-generation scenarios, for example on a cold, calm winter evening there is no solar power and very little wind generation. In these situations, prices will rise, but no price signal will be enough to stimulate more generation from wind and solar because we cannot control the weather. Of course, this will be a signal to import more or fire-up other little-used generators, to supply power at extremely high prices to cover their costs. The idea is that consumers shift their demand to different times of the day. It may be possible to defer some demand such as overnight charging of EVs or switching off a fridge for an hour. However, very few, especially families with young children will wish to turn off their heat-pump and let their house start to cool when it is minus 5 outside. Nor will they want to delay their evening meal until after the kids’ bedtime. In effect, consumers will be clobbered by higher prices with no penalty to the generators.
In a low demand, high generation scenario like a sunny and windy spring day then the market value of generation may fall to zero, or perhaps even negative. This would be an incentive to use more electricity at those times. But there are very few high demand appliances that can be turned on to consume this excess energy. The car is unlikely to be on the drive; if you are working you cannot just slip home and batch cook meals for the next week and you will not need to turn on the heating. Renewables generators will still receive the full subsidised strike price of their Contract for Difference (CfD), with consumers picking up the balance between the low market value and the strike price, as when we discussed the Agile Octopus tariff. Generators on old-style CfD contracts that are switched off will likely receive a curtailment payment. Even those on newer CfDs with less generous curtailment provisions will simply adjust their auction bids to ensure they make money overall.
Conclusions
In both scenarios the consumer loses. At times of high demand, they must pay through the nose to fire up backup generators, with little scope for making a significant dent in their demand. At times of low demand, they will have little scope to increase their power usage and still pay the full subsidised price for renewable electricity.
If supply was flexible and prices not distorted by subsidies, TOUTs might make some sense. They could incentivise marginal changes in price to reduce the size of peaks and troughs in demand to make the entire system more efficient. However, it is difficult to avoid the conclusion that TOUTs are being used to design the grid around the needs of producers. It is not sustainable to expect consumers to pay the price of renewables and run their lives around the needs of the grid. We should be aiming for cheap energy abundance.
If you have enjoyed this podcast, please share it with your family friends and colleagues and sign up to receive more content.
Eigen Values is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Get full access to Eigen Values at davidturver.substack.com/subscribe
