As efforts to reach a carbon neutral power system by 2035 intensify, it’s increasingly important to achieve a more flexible and decentralised energy grid. In this context, demand response programs – where consumers are encouraged to shift consumption away from peak hours – are growing in popularity as a way to alleviate stress on the grid and facilitate the integration of intermittent renewables.
Time-of-Use (ToU) tariffs greatly contribute to this mechanism. By offering cheaper electricity during off-peak hours, they encourage consumers to adjust their energy consumption – promoting a more sustainable power system while saving people money.
It’s a win-win situation, as utilities can better manage demand and consumers can lower their energy bills. So why is uptake not higher?
The evolution of time-of-use billing
To explain why ToU tariffs aren’t as popular as we might expect, we need some historical background.
“People may think that time-of-use is a new concept, but it was actually more widespread during the 80s and early 90s, and was primarily targeted at customers with old electric ‘night storage’ heating,” explains Ben Martin-Denham, Product Owner at ENSEK.
“In this period, energy companies would typically charge an above-average rate for electricity consumed during the day, but because the customers consumed far more energy during the night, they could still save money. As night storage heaters became less prevalent, ToU billing was no longer cost-effective for customers’ changing consumption patterns.”
In response to this, over the last decade Ofgem mandated suppliers to actively review whether customers using ToU tariffs were benefiting from them. When a customer was not using more than one-third of their total consumption during the lower rate periods, energy suppliers were obliged to either exchange the ToU meter for a single rate one, or move the customer to a single rate tariff.
Ofgem’s intervention, together with the fact the customers seemed to prefer the stability of a consistent and predictable unit rate, promoted the move away from ToU billing. However, the spiralling wholesale energy costs we’ve observed recently, coupled with the increased uptake of EVs and renewable energy generation, have made these tariffs relevant once again.
In fact, EVs went from having a market share of 1.7% in 2019, to 14.7% in 2024 – encouraging consumers with a home charge point to look into the most convenient tariffs to charge their vehicles overnight.
“About 5.5 million people in the UK are already using multi-rate energy tariffs,” continues Ben. “We must also consider that all smart meters installed in the UK are also capable of ToU billing, meaning that ToU tariffs might become increasingly popular. Now, any customer with a smart meter can be instantly switched to a ToU tariff, and because smart meters record on a half-hourly basis, there is also an opportunity to use ToU tariffs in a much more dynamic way than in the past.”
In the current domestic market, there are few options for customers to select a more dynamic ‘market tracking’ billing solution, and this is largely the product of legacy billing systems anchored in relatively static pricing models. But this is already changing. Some progressive suppliers have begun offering integrations for demand response programs in the UK domestic market, providing push notifications to customers asking them to reduce their consumption during periods of peak load, when non-renewable generation is used and wholesale energy costs spike accordingly.
“This represents an important evolution from traditional ToU billing – which groups energy use into large ‘cost blocks’ – to tailored rates that are dependent on the presence of half-hourly meters at the customer’s property,” concludes Ben.
The challenges of engaging consumers
A study from National Grid ESO shows that consumers engaged in demand response programs could reduce demand at peak times by up to 23%. But for demand response to work at scale, high consumer participation will be crucial.
This is by no means an easy feat, and even households with high electricity consumption do not appear to be sufficiently engaged. For example, in 2022 only one in four EV owners were on a ToU tariff.
That’s why, on August 17th 2023, Ofgem has issued a call for input on this very topic, asking for suggestions on how to increase the uptake in demand side response initiatives among domestic consumers.
“Thanks to recent changes, suppliers now have to ensure that the day rate in ToU tariffs is not significantly higher than the standard single rate unit rate,’” explains Ben. “This means that customers no longer risk being penalised when trying to manage their demand to benefit from lower rate prices via ToU. Promoting this fact should significantly help with adoption of ToU billing.
“Also, modern devices such as washing machines and tumble dryers can be programmed to run at certain times, further helping customers to benefit from ToU billing.”
Enhancing the benefits of time-of-use tariffs
There are still several challenges to overcome to increase consumer engagement in ToU tariffs, and clearly communicating the benefits will be essential to get more people on board. But the main challenge remains making ToU tariffs truly beneficial for a larger number of households.
A study from Citizens Advice showed that some of the most common ToU tariffs offer limited value to most consumers – unless they use electric heating and/or EVs.
For example, Economy 7 is a popular plan that provides discounted energy for seven hours a day, normally between midnight and 7am. However, this is not suited to most households, which are unable to shift enough energy usage to see a substantial difference in their energy bills.
It is likely that, with the increased popularity of EVs and heat pumps, more and more users will see the benefits of similar tariffs. Moreover, marketwide half-hourly settlement will likely push utilities to offer a wider and more diverse range of ToU plans, encouraging consumers to opt in.
However, the widespread uptake of ToU tariffs will require a conscious effort from energy suppliers to provide truly flexible and customisable plans.
Striving for true flexibility
The Citizens Advice report suggests that real-time tariffs, when combined with automated controls, would provide much more value to customers than fixed ToU tariffs such as Economy 7.
At the end of 2022, over 55% of all UK meters were smart meters, meaning that we are now well under way to have full visibility of consumers’ energy usage patterns and predict demand more accurately.
Continuing with the roll out of smart meters at scale will be crucial to offer flexible pricing plans that allow consumers to choose a ToU tariff that best suits their needs and lifestyle – including tiered pricing and customisable offers.
Real-time tariffs could certainly encourage more consumers to take advantage of ToU billing, but this level of flexibility will require utilities to adapt. Having a platform that is flexible enough to respond to market changes is essential to future-proof processes, stay on track with the evolution of tariffs, and ultimately respond to customer demands.
To get specialist support in future-proofing your operations and achieve truly flexible operations, get in touch with the ENSEK team and book a 30-minute discovery call.
