Evidence Check: Smart metering of electricity and gas Contents

3Changing when energy is used

42.DECC told us that smart meters will enable ‘time of use’ (ToU) tariffs to be introduced, with different prices at different times of day. There are two ways in which a ToU tariff could operate: either as a static tariff, with different pricing periods remaining fixed, or a dynamic tariff, where prices could be set according to the prevailing generating costs and communicated to consumers via their In Home Display, or utilised through automated appliances. By altering the price during the day, such tariffs can incentivise consumers to avoid times of peak demand, and therefore reduce the need for excess capacity in the system overall to cope with peaks and troughs. DECC’s 2014 impact analysis assumed that, including existing Economy 7 customers, there would be a 20% take up of static ToU tariffs, starting from 2016.68 ToU tariffs are only relevant to electricity usage, as gas is not generated on demand in the same way.

43.Lord Bourne, the then Parliamentary Under Secretary of State for Climate Change, explained in June that ToU tariffs would be “beneficial to the nation at large, because it will smooth demand, which will mean that demand is less at peak times, and enable us to manage the whole system better”.69 Daron Walker, the then Senior Responsible Owner for the smart metering implementation plans at DECC, told us that it was “really early days” for ToU tariffs.70 He explained that DECC’s smart metering impact assessment had “assumed very low levels of penetration of time of use” and that ToU was “not embedded in [DECC’s] business case”.71 Nevertheless, Dr Sarah Darby noted that smart meters and ToU tariffs laid the ground for further energy-saving innovations in the future:

In the longer term, ToU tariffs could form part of programmes to manage the charging of electric vehicles and storage heaters, the timing of heat pumps and the provision of distributed storage (in hot water tanks, batteries and other media). This type of arrangement is already being piloted, partly by Government-funded research, and it could make a substantial difference to the flexibility of the electricity system. Householders’ familiarity with the technologies and rationale behind such programmes will be a vital issue here.

The impact of ToU: sources of evidence

44.While ToU tariffs may be “some way down the line”,72 the extent to which consumers are able to vary when they use electricity has been explored in research. The results of some of the major trials highlighted in written evidence are summarised in Table 4; the general consensus appears to be that ToU tariffs can shift 8–10% of peak demand.

Table 4: Results from a selection of (UK) smart meter studies that include Time of Use tariffs

Study

Scale

Peak demand shifted

Notes

Energy Demand Research Project (2007–10)A

194 (EDF); 1,352 (SSE)

“Up to 10%” of peak load can be shifted

Two ToU trials; one run by EDF, the other by SSE

Consumer Network Revolution ProjectB

628 participants

8% reduction in average peak power demand; 6% reduction in average annual consumption during peak periods; no statistically significant reduction in average annual consumption compared to smart metering without ToU tariff.

Low Carbon London trials (2012–14)C

1,119

9%

Included dynamic ToU. This trial tried to simulate “not just a regular peak—winter evenings—but the impact on the system of having a lot of wind or little wind, looking ahead to a time when there are lots of renewables in the mix. It was sending signals to customers a day ahead, as you might do on the basis of a weather forecast, to tell them what the price was going to be. A lot of customers quite got into that, and found it an appealing and engaging thing to do”.D

British Gas free Saturdays or SundaysE

4,000 British Gas customers

11%

CER Smart meter trials in Ireland (2009–10)F

5,028

8.8% reduction in peak consumption

Study used a combination of ToU and demand side reduction

A Ofgem, Energy Demand Research Project: Final Analysis (June 2011) para 1.5

B Durham University (SME 26) para 3.2

C UK Power Networks, Residential Demand Side Response for outage management and as an alternative to network reinforcement Report A1 (September 2014)

D Q37 [Dr Darby]

E Qq30–31

F Commission for Energy Regulation, Electricity Smart Metering Customer Behaviour Trials (CBT) Findings Report CER 11080a (May 2011)

45.Professor Liddell provided data on the scope for peak load transfer in other countries (as described in their own impact assessments), emphasising that the scope for transfer in Great Britain is more limited than in other parts of Europe.73 Nick Hunn explained that other countries have additional demands from air conditioning, and that “we have one of the smallest variations between peak and standard demand of almost any country in the world […] We have such a different demand curve from most of the rest of the world that we are going to have to make it up as we go along”.74

Smoothing energy demand

46.Clearly if consumers are to change their behaviour they must have the opportunity to act differently as well as the ability and motivation. The Institute of Directors (IoD) argued that “the only real ‘activities’ that can be shifted (and not without their own inconveniences) relate to washing machines and dishwashers”. The IoD told us that it was “a fundamental conceit at the heart of the smart meters programme” that householders have large flexibility over how much energy they use and when.75

47.DECC’s impact analysis estimates that the “discretionary load”—the portion of consumption that can potentially be shifted to off-peak times—is 20% of the total consumption at peak, comprising 17% from ‘wet’ appliances (i.e. washing machines and dishwashers) and 3% from other sources.76 The analysis also assesses what part of this discretionary load will actually be shifted by consumers:

In the short run, we assume that those customers on STOU [static Time of Use tariffs] will only shift one third of the discretionary load at peak that they actually could. As time goes by, we expect the number of times that load is actually shifted to increase to 50% of the available discretionary load, driven by the consolidation of the behavioural change and customer familiarisation with the technology, and the role of other factors such as higher price differentials and the introduction of some home automation and smart appliances, which would reduce the need for active action by the householder.77

48.Professor Harriet Bulkeley and colleagues at Durham University noted that “ToU tariffs can work very well for households with high levels of flexibility capital. The ability of customers to be flexible is not only related to the design of the tariff and the incentive it provides but linked to existing patterns and structures of social life”.78 The Federation of Small Businesses also raised this as an issue for SMEs:

It is clear that some businesses will be more able to take advantage of Time of Use charges than others, depending on the nature of their operation. FSB also raises caution that many businesses operate on different cycles to the average domestic customer. So a one size fits all approach to Time of Use charges will not work. In order to drive behaviour change, the market will need to provide not only a price disincentive against using energy at certain times, but also a clear pathway for achieving this. For instance, it may be prudent to consider a recommendation for all users above a certain energy threshold to implement storage and management systems that allow them to run ’off line’ at certain times of the day.79

49.Nick Hunn believed that in order to significantly influence consumer behaviour through ToU tariffs “you need either to set a low value for the cheap one, which the customers jump on and then the energy supplier loses money, or to ramp up the peaks so much that the regulator steps in”.80 Dr Darby told us that “where the ratio between the peak and the off-peak cost is very slight, you tend to get a pretty slight response. We have seen that in Italy and Ontario, for example”.81 Other examples noted by witnesses were

50.We asked the Minister whether he would be comfortable with ToU peak prices being many times higher than at non-peak times in order to prompt a large enough response to materially smooth demand. He told us that competition between suppliers would limit the severity of such a tariff: “We have many more energy suppliers now than we had even five years ago, so I just do not see it happening”.83 Sacha Deshmukh told us that high peak time prices were not the only mechanism that could deliver behaviour change, pointing to increased take up of recycling and smoking cessation campaigns as examples of where behavioural change can arise through “a combination of understanding that it is good for them in a marketplace and good for their household, and that it has a national benefit”.84

51.The extent to which consumers themselves save money through ToU tariffs depends on the details of the tariff and the extent to which consumers are able and willing to alter when they use energy. Smart Energy GB told us that the CLNR study referred to above had found that “the majority” saved money on their energy bills through a time of use tariff, although Professor Harriet Bulkeley highlighted how many would have seen an increase in their bill:

Analysis of shadow billing data provided by British Gas indicates that 243 of the 628 [CLNR] participants (39%) would have paid more money for their electricity by being on the tariff had they not been compensated by the project for the increased bills incurred in-trial. Of these the median increase would have been £18.40.

52.There is an extensive range of studies providing evidence on the likelihood and scale of consumers changing their usage patterns in response to Time of Use tariffs. Some evidence suggests that driving genuinely significant change could require a level of differential pricing which might be commercially, and potentially politically, difficult.


69 Q84

70 Q88

71 Q88 [Daron Walker]

72 Q90 [Lord Bourne]

73 Professor Christine Liddell (SME 11) figure 3

74 Q37 [Nick Hunn]

75 Institute of Directors (SME 28)

78 Durham University (SME 26) para 1.1

79 Federation of Small Businesses (SME 36) para 3.3

80 Q37 [Nick Hunn]

81 Q37 [Dr Darby]

82 Q37 [Dr Darby]

83 Q85

84 Qq86–87




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16 September 2016