Domestic flexibility through Time of Use (ToU) tariffs is back in the news, this time under the guise of the UK’s Market Wide Half Hourly Settlement (MHHS). MHHS enables energy suppliers to create tariffs to incentivise consumers to adjust their consumption against the national availability of power . This is “implicit” flexibility.
However, it ignores other vectors of value, such as the locational availability of network capacity. This is increasingly being handled through “explicit” price signals in emerging flexibility markets. Without explicit locational price signals, ToU tariffs have the potential to exacerbate grid constraints through consumer herding – as our Head of Product, Nick Huntbatch, examines in this article.
Market-wide Half Hourly Settlement, or MHHS in industry jargon, relates to the implementation of half-hourly settlement across the wholesale (or retail) electricity market. This is a government mandate that requires energy suppliers in the UK to settle trades and payments in half-hour chunks for all customers. MHHS is therefore closely linked to how the end consumer interacts with the energy system, as it is an enabler for the wider roll-out of dynamic, or Time of Use, tariffs.
The long road to Market-Wide Half Hourly Settlement
When Ofgem – the UK’s energy market regulator – made the decision to approve MHHS in April 2021, it cited benefits of between £1.6bn to £4.5bn over the period 2021-2045. MHHS is therefore a key step in delivering its “Smart Systems and Flexibility Plan,” which underpins the UK’s 2050 Net Zero plan.
However, the progress of MHHS has not been entirely smooth. This is partly due to the challenges associated with the smart meter rollout, on which MHHS depends. According to government figures released last year, 57% of electricity and gas meters in the UK were “smart” in March 2023 – so there is some way to go.
Subsequently, the latest update from Ofgem suggests that MHHS will not be delivered before December 2026.
Smoothing the path to MHHS
MHHS is back in the news now with the Elexon decision to approve P432 or “Half Hourly Settlement for Current Transformer Advanced Meter Systems.”
Whilst there is a lot of detail in that code modification, at a high level, Elexon states that it “will smooth the path toward Market-wide Half Hourly Settlement.”
Many people think that much of the “heavy lifting” for electricity system flexibility can be done via ToU tariffs. While this may be true in some cases, for example with system balancing if price signals are sharp enough, there is much more to it.
So, what does the implementation of MHHS and the roll out of ToU tariffs mean for flexibility and consumers?
Time of Use tariffs
ToU tariffs are provided by suppliers and aim to reflect wholesale prices, so end consumers can benefit when energy prices are low. This represents a form of domestic flexibility, where end consumers are encouraged to use more or less power, given a price signal from their supplier.
We already see these types of tariffs available today from innovative suppliers. Some are so called “static” ToU tariffs, where there are set periods of relatively low and relatively high price – for example lower prices between 11pm and 6am overnight.
Others are “real-time” tariffs, which track wholesale prices over each settlement period. Another interesting trend is the targeting of tariffs at specific technology segments, such as EVs or heat pumps.
The roll-out of smart meters and the implementation of MHHS should allow suppliers to provide more of these innovative tariffs. This will allow the end consumer in theory to benefit from times where there is excess renewable power available on the system.
Implications for domestic flexibility
The benefits and implications of doing so for the end consumer rightly continue to be widely discussed elsewhere. This includes the wisdom of exposing end consumers to real-time prices, as well as the wider Review of Electricity Market Arrangements (REMA) and the discussion of locational price signals.
In any case, MHHS can provide a lot of data about consumer behaviour at low voltage, an area of the network which to date has been opaque in terms of who is doing what and when.
We therefore expect MHHS to result in many new and innovative data offerings for end consumers – and potentially provide crucial information for a range of stakeholders including System Operators.
ToU tariffs therefore allow end consumers to engage with the energy system in a more dynamic way than in the past, meaning that there are opportunities to be rewarded for changing when they use energy. Yet, there is a crucial piece of the jigsaw missing – the location of usage and the impact on the underlying system itself.
To explain, the suppliers align their ToU tariffs to wholesale prices, and end consumers naturally prioritise their use to periods of lower cost. When multiple end consumers do this, the outcome is what is known as “consumer herding.” This is where peaks in demand occur during times of low, wholesale energy prices.
National balancing vs. local network stability
In some situations, ToU tariffs are an economic solution to a key issue, such as California’s solar generation and middle-of-the-day negative net load.
However, in general, we are not dealing with an economic-only market structure: remember those physics! Behind energy markets sit physical grids and delivery systems that are subject to operational limits.
A method of encouraging domestic flexibility (i.e. ToU tariffs) without regard for the underlying system can represent a threat to the stability of that system. Plenty of data out there shows these potential issues.
Time of use and location of use
The concept of flexibility markets was developed in the UK specifically to help System Operators manage the stability of the power system and the flow of electricity on the grid – including managing peak demand and locational grid congestion.
System Operators also use flex markets to perform activities such as network reinforcement planning, which implicitly cannot be done via ToU tariffs.
Transmission System Operators in Great Britain have procured and instructed flexibility through market mechanisms for many years. National Grid ESO separated from the National Grid transmission arm in 2019, to focus on running the electricity system.
The system operators use markets to procure flexibility with respect to a time and location on the network, both a voltage level and network node.
Using markets, they can contract flexibility from a vast array of technology types, from domestic aggregators to grid-scale batteries, at a range of time horizons, from months ahead of time to intraday.
These markets allow for flexibility actions taken explicitly to help manage the grid’s stability.
Increasingly, Distribution Network Operators (DNOs) have needed to build out system operation capabilities too. The importance of the distribution network to decarbonising society – for example, the transport and domestic heating sectors – drives this shift.
Consumer flexibility markets
The end consumer can and does also benefit today from participation in flexibility markets. These opportunities for end consumers to be rewarded for being flexible via markets are only set to increase.
For example:
- Octopus Energy “Power-Ups” reward consumers to increase demand at certain periods of time and locations based on both transmission and distribution level flexibility market events.
- UK Power Networks recently launched a “Day Ahead Market,” which specifically targets aggregated domestic flexibility nearer to real-time to help manage locational network congestion.
- The ESO’s well-known Demand Flexibility Service (DFS) also brought domestic flex into the UK’s public consciousness over the last year or so.
ToU tariffs will sit alongside markets
With the appropriate consumer protections, ToU tariffs, supported by MHHS, therefore have the potential to play an important role in the energy transition, where times of overabundance of clean energy can be leveraged to the benefit of the end consumer.
However, we must consider the wider ramifications of these tariffs, specifically for the network. If we don’t, they could hinder the energy transition by adding extra stress to the grid and requiring more extensive long-term network upgrades.
Building on that thought, dynamic, locational flexibility markets will be an increasingly crucial tool as ToU tariffs become a more common offering from suppliers with the implementation of MHHS.
We see multiple routes developing for end-consumers to access rewards for being flexible in their energy consumption, and ToU tariffs will sit next to flexibility market-based events. We must consider the impact of each incentive and subsequent action on the whole system.
