Author: Nick Huntbatch, CPO, Electron
In recent years, we have seen a focus on encouraging domestic end consumers to be flexible in their use of electricity. Whether the ever-expanding suite of tariff offerings from suppliers, or initiatives like the UK National Energy System Operator’s (NESO) Demand Flexibility Service (DFS), the average household is increasingly aware of what it means to be flexible.
Flexibility from domestic demand is key to realising both the UK’s Clean Power 2030 and Net Zero 2050 goals.
In this blog, I lift the lid on how domestic end consumers are incentivised to be flexible today.
1. Supplier offerings through tariffs
The concept of being “flexible” may be a new concept to some people. However, rates that vary throughout the day and night have been around for decades.
The evolution of flexible tariffs
Economy 7 was first introduced in 1978 in the UK. It established the notion that the rate you pay for electricity can vary over the course of 24 hours. Economy 7 is a known as a “static” time-of-use tariff. This means that there are two or more rates the consumer pays for electricity at fixed times of the day. For example, daytime and overnight.
Today, we are seeing suppliers presenting an increasingly broad set of time-of-use offerings to domestic end consumers, to encourage them to change how they use electricity.
These might be “dynamic” tariffs that more closely reflect wholesale electricity prices over the course of the day (e.g. every half hour). For example, the Octopus Agile tariff is based off the Day Ahead wholesale (N2EX) price. Or they might be so called type-of-use tariffs, like OVO’s “Charge Anytime” for EV charging, or “Cosy Octopus” for heat pumps.
The influence of wholesale prices
In general, these tariffs reflect the wholesale electricity price back to the end consumer with higher temporal granularity.
Type-of-use tariffs do this for a specific asset, rather than the entire house. This allows the supplier to “abstract away” from the end consumer some of the risks of exposure to volatile wholesale prices. The “middleware” works it all out on behalf of the end consumer for the specific asset in people’s homes.
For example, Kaluza’s tech ensures that EVs charge to a user’s schedule based around the price of energy for the OVO Charge Anytime tariff.
2. System needs for flex
Time-of-use tariffs reflect the wholesale electricity price, but there are other forms of flexibility required by the electricity system that are not driven by the price of electricity.
Flexibility for grid optimisation
This need is related to the grid that underpins both the transmission and distribution system. The wires, substations, and transformers that carry power across the country are subject to physical limits. These are a function of aspects such as the capacity of transformers and how much power wires can carry at a given time.
The operation of the system is the responsibility of the system operators, NESO and SP Transmission at transmission level, and the seven UK distribution system operators (DSOs) at distribution level. The system operators must ensure security of supply. They therefore increasingly need to turn to flexibility to optimise the use of their networks by time and place.
Categorising flexibility needs
The flexibility needs of system operators fall within three categories: grid congestion and constraints, post fault restoration, and energy saving.
Some UK examples include:
- The NESO introduced the Demand Flexibility Service (or DFS) in the winter of 2022/2023 to deal with periods of tight margin where there is scarce generation to match with demand. This is system-wide and asks domestic end consumers (and others) to reduce their demand during tight periods. During the first iterations of DFS, the guaranteed acceptance price was £3000/MWh, an illustration of how system flex is not directly linked to the wholesale price of electricity.
- The Local Constraints Market (or LCM) was introduced in 2022 to help NESO manage transmission level constraints where there is too much generation on the system moving from Scotland to England (across the so-called B4, B5 and B6 boundaries). This asks domestic end consumers to use more electricity in specific locations at specific times to relieve export constraints.
- At distribution level, DSO’s use flexibility services – such as those offered through market platform, ElectronConnect – to manage the increasingly dynamic distribution system. This includes managing grid congestion and network planning, post fault situations, and energy saving.
How consumers engage with system flex
End consumers do not engage directly with any of the above, rather via a third-party organisation. The most obvious and well known of these is the energy supplier, who has existing relationships with end consumers.
For example, Octopus presents LCM events and demand turn-up DSO Flexibility Services to their customers as “Power Ups”. This is where their customers can use power for free or at half rate.
Octopus then receives payment from system operators to provide demand turn up in specific locations at specific times. OVO present DFS events to their customers as “Power Move” and rewards customers for demand turn down. NESO in turn pays Ovo for that service.
The supplier face of flexibility
The need for suppliers to stand-out in the market drives this activity. I.e. rewarding their customers, either with cheaper rates or other forms of reward or rebates, or a non-financial reward such as indicating that they are using green energy.
It is worth noting that, at the beginning of 2024, Ofgem mandated that a supplier must be able to switch a customer’s supply within five working days. This makes it easier for customers to switch. However, also raises the stakes for suppliers to maintain and expand their user base.
Increasingly we are seeing other innovative organisations, that don’t hold a supplier license, engaging end consumers. These are known as (domestic) “independent Aggregators”. They typically assume control of one or more assets within households, for example an EV charger or in-home battery.
The aggregators use this control to access one or many of the system flex revenue streams as outlined above or to engage in wholesale market arbitrage (since Balancing and Settlement code amendment p415 was rolled out).
Aggregators engage domestic consumers directly outside of the existing relationship the consumer has with their supplier. This is often a separate touchpoint with the customer. For example, via a hardware purchase such as an EV charger.
Domestic consumer considerations for engaging with flex
End consumers today make a conscious choice whether to choose a time-of-use tariff with their supplier, or to engage an independent aggregator, if they think it will be of net benefit to them.
Although it has been proposed that consumers should somehow be “flexible by default” – and “default opt-ins” are already in use, for example with smart EV charging – the decision is generally left to them.
This means that the end consumer must be relatively energy savvy and has thought about any potential downsides of switching. The obvious example of this is whether they can sufficiently avoid the price spikes associated with dynamic time-of-use tariffs.
This decision fundamentally comes down to assessing a household’s ‘shiftable’ load. Often, the possession or otherwise of an EV or other similar significant load dominates the calculation. This is where we need to talk about the ‘fairness’ of the energy transition, and who can access the benefits.
Time-of-use tariffs today don’t make sense to end consumers with low levels of shiftable load. Those consumers end up paying more overall as they are exposed to increased prices at peak periods.
It is safe to say that the thought that we can move increasing numbers of the population on to time-of-use tariffs raises some pretty important questions. This particularly true around the role of flexibility markets, which I will explore in my next blog.
