The first 'time of use' tariff in the UK. Will it save users money?

Any economist will tell you that prices will eventually align with underlying costs of a product or service. This is as true for electricity as it is for cars or nursing home care. But for domestic consumers today in most countries of the world, electricity is priced at levels removed from the underlying cost to provide it.

The most obvious example is the failure of domestic tariffs to rise in periods of peak demand. In an economically rational world, power prices should be highest in cold, dark countries in the early evening in winter. In hot places, by contrast, they might be highest at the same time in summer as air-conditioning is working its hardest. But electricity prices generally stay the same across the day.

Very gradually, new technologies such as smart meters are making it possible for electricity retailers to introduce ‘time of use’ (ToU) pricing for homes and small businesses, helping to bring prices closer to costs. (ToU often exists already for big users, albeit in a somewhat opaque form). In places such as Hawai’i and California time of use charges are well established. The UK’s first nationwide offer was launched last week, giving customers a 5p (6 US cents) per kWh tariff for seven overnight hours and a 25p (30 US cents) figure for 16.00 to 19.00 on weekdays. Intermediate times are priced at 12p.

For the average user, the new Green Energy UK pricing structure will probably save a little money compared to the cheapest tariffs from large electricity providers, even before the household adjusts its power consumption to move it out of peak use.[1] I worked this conclusion out using the invaluable data from Cambridge Architectural Research on hourly patterns of electricity use in British homes.

CAR’s data comes from live observations of real houses several years ago. Power use, particularly for lighting, has fallen since but I have nevertheless used their numbers without any decrease. This means that my calculations are about now about right for a house that uses about 20% more electricity than average.

Average UK household electricity consumption over the course of a day

 Source: Cambridge Architectural Research, published at https://www.gov.uk/government/collections/household-electricity-survey, 2014

Source: Cambridge Architectural Research, published at https://www.gov.uk/government/collections/household-electricity-survey, 2014

Very roughly, a typical household taking the new Green Energy package will pay about £570 for electricity compared to about £580 for the Scottish Power tariff, the cheapest mainstream supplier at the moment. The difference is therefore small but the gap is widened if the household takes deliberate action to move its energy use out of the penal 3 hour weekday tariff between 16.00 and 19.00.

The CAR research suggests that the average home is using about 670 watts during peak time across the year. Cooking is the largest single element across the week at 121 watts, with audiovisual kit next at 92 watts.  Cold appliance and washing and drying machines follow at between 60 and 70 watt each. These power uses could clearly be pushed into adjoining time periods. Fridges, for example, can be automatically turned off for three hours with no impact on food quality. It should be easy to reduce typical demand by 150 watts in the peak period and this would increase the saving to around £25, making the Green Energy tariff probably the cheapest in the UK at the moment.

But, you may say, does it really make sense to save a little money in return for the hassle of having to manage the timing of electricity use? Probably not. But, in the longer term, ToU tariffs will also appeal to two categories of domestic households.

First, electric car owners are being offered a chance to do all their charging at just 5p a kilowatt hour at night. This compares to about 6p for other suppliers offering ‘Economy 7’ tariffs which offer low prices at night but higher prices at other times of day. Electric car users will almost certainly be better off using the new Green Energy rate.

The low night rate may also encourage the installation of domestic battery systems although payback times are still very long indeed. Power will be imported at night and then used during the day, including at peak time. This will save up to £300 a year for the typical medium-to-high user and more for a large house. To fully avoid daytime charges (either the standard rate or the peak fee), the battery system will need to store at least 12 kWh. This about matches the capacity of the Tesla Powerwall 2 (nominal 14 kWh, actual about 13 kWh) which has installed costs, including a separate inverter, of around £5,500-£6,000. It will be twenty years – longer than the likely life of the battery – before this cost is recouped.

A much smaller battery, sized simply to avoid all Green Energy’s peak charges between 16.00 and 19.00 on weekdays, is probably only a little better. A 2 kWh battery, such as the Maslow or an Aquion, might cost around £3,000 installed with an inverter and with timers to charge it during the night and discharge it at peak. The maximum saving here might be around £200 a year, implying a 15 year payback. As battery prices come down, the economics will improve.

What about the impact of a ToU tariff on households with solar panels? Perhaps 90% of the output of an array is likely to be in the period of intermediate prices in the Green Energy tariff. So the money saved by having PV is unlikely to be substantially greater than for households without solar.

Lastly, there is one thing that the wily customer should definitely do. Subscribe to the new Green Energy tariff for the summer months (when household peak usage is lower than in winter and therefore the impact of the penal 16.00 to 19.00 rates is less) and then switch back to conventional suppliers for the October to March period when peak needs are higher. Unfortunately, if too many people do this, the supplier will struggle to be profitable with its current prices. Let’s hope this doesn’t happen because in the long term it is in society’s interest that all electricity prices are tied to time of use. (To make the obvious point the reason for this is that ToU tariffs will help minimise the early evening peak in electricity demand and thus reduce the need for expensive and high carbon ‘peaker’ electricity generating plants).

[1] I compared the Green Energy tariffs with the lowest tariff I could find on a price comparison web site from a big supplier. This was Scottish Power’s March 2018 price.