With energy emerging as a kitchen table issue, smart tariffs offer a way for households to save money on their bills, while contributing to the creation of a secure, decarbonised electricity system. But suppliers face numerous challenges in unleashing their full potential, including outdated systems and markets that fails to properly reward households for their flexibility. Tom Grimwood examines the current state of the market for smart tariffs and remaining barriers to their widespread adoption.

In the homes of the future, people will no longer be passive consumers of electricity, simply taking power from the grid as and when they need it. Instead, whether consciously or not, they will be active participants in a smarter, more decentralised energy system, importing and exporting electricity based on price signals reflecting renewable output and available grid capacity at the time.

This vision has been talked about in the energy industry for many years. Indeed, the rollout of smart meters, one of the keys to unlocking it, has already been going for more than a decade. As well as bringing an end to the archaic system of guesstimation that has long underpinned settlement and billing, smart meters will enable suppliers to track people’s consumption in each half-hour settlement period and offer them smart tariffs that incorporate the aforementioned price signals.

The rollout has been plagued by problems – suppliers now have until 2025 to offer all households a smart meter, five years later than originally planned. Nevertheless, according to the latest government statistics, of the 28.8 million domestic electricity meters in Great Britain at the end of September, roughly half – 14.4 million – were smart meters operating in smart mode.

In theory, at least, there is already a large potential market for smart tariffs. Most large suppliers do now offer some form of smart tariff, but most are also relatively simple in nature, essentially modern versions of the old Economy 7 tariffs, offering cheaper overnight electricity and usually with electric vehicle charging in mind. There is still a long way to go until their full potential is unleashed.

Utility Week takes a look at the progress so far and the potential blockers to faster progress, featuring comments from Octopus, Ovo, Green Energy UK, Ofgem and Energy Systems Catapult.

This includes:

• Whether ‘type-of-use’ tariffs will ultimately win out over ‘time-of-use’ products
• The value of key markets and how this is changing as Britain makes its way through an energy crisis and renewables take over
• Concerns over the accessibility of these markets
• Calls for more granular wholesale prices and network charges
• Slow progress in moving to half-hourly settlement
• How to get buy-in from consumers

Time-of-use vs type-of-use

Summarising the current state of the market, Dylan Johnson from Future Energy Associates says their database of energy tariffs shows “smart tariffs have become increasingly prevalent in the UK retail energy market, with many suppliers offering options tailored to specific needs.”

“This variety of smart tariffs includes tariffs designed for households with EVs, with heat pumps, those with the ability to sell electricity back to the grid or just households that want to take advantage of fluctuating electricity prices and shift energy consumption to cheaper periods.”

Yet Johnson says the opportunities presented by the now substantial number of smart meter customers is still “largely untapped, with most suppliers having limited offers. We think there is much more potential for innovative tariffs that cater to different consumption profiles and give greater flexibility and control for customers.”

Arguably, the company that has been pushing boundaries the furthest is Octopus Energy, for example, with its Agile Octopus tariff (see case study). Introduced in 2018, this was and remains the only time-of-use tariff on the market that provides customers with half-hourly prices indexed to those on the wholesale market.

The tariff has been well received by early adopters and energy technology geeks, who can sometimes be found on social media discussing price trends and one-upping each other with their bill savings.

Despite their potential exposure to high power prices over the last year, Octopus’ head of flexibility Alex Schoch says the number of customers on the tariff has remained relatively stable: “Agile continues to be a tariff where customers who want to be very engaged with their electricity usage and how they use it, can get substantial benefit from it. But it requires either you have a set-up where you’ve automated or timed a lot of your big loads or you’re super engaged.

“We know smart tariffs are continuing to be an incredible draw to consumers but different offerings are suited for different types of customers.”

In terms of customers though, Octopus has recently been having more success with its Intelligent Octopus EV tariff, which has seen consistent 30% month-on-month growth over the last year.

At first glance, Intelligent Octopus may appear to be just another modernisation of the old Economy 7 tariffs – the supplier also has one of these called Octopus Go – but like a swan swimming on a lake, the real action is going on beneath the surface. To access this lower rate, customers must put Octopus in control of timing, subject to their requirements of what charge level they need by when.

The company recently revealed it is now managing over 100MW of charging capacity through the tariff – more than the largest battery facility on the power grid.

“Our Agile Octopus tariff appeals to a certain type of consumer but not as much as Intelligent Octopus appeals to consumers and I think that’s because if you look at the way these different tariffs are designed – some have more clearly defined price periods and others are more dynamic,” notes Schoch.

“I think in a world where you see constantly in the news incredibly high wholesale prices that can be a bit of a detraction from customers wanting to be on a tariff that is directly indexed to the wholesale market.”

He continues: “As you get more and more comfortable with managing your electricity use, then different smart tariffs appeal to you. Some people are willing to take more risk and be more actively engaged day-to-day versus others who like that price certainty.”

“There’s no one smart tariff to rule them all,” he remarks.

Kieron Stopforth, origination manager at Octopus, is less ambiguous in his belief that tariffs like Intelligent Octopus have more mass market appeal: “What a tariff is if you think about it fundamental terms is a kind of hedge against the price volatility of needing to buy power every half-hour…

“There will always probably be a part of the base that does want the time-of-use tariffs but meanwhile if you’re talking about mass electric vehicle (EV) adoption, or even mass market flexibility from whatever sources, you have to make that as simple and accessible as possible and it’s why we’ve been putting a lot of effort into developing the Intelligent Octopus tariff…

“Customers plug in, integrate the EV, tell us when they need the car charged by and when they need it; all of the optimisation and price sensitivity stuff happens in the background that means we can offer a super low-cost tariff to customers for that portion of their demand”.

Valts Grintals, from Kaluza, takes an even firmer position that what they and their parent company Ovo refer to as ‘type-of-use’ tariffs will win out over time-of-use tariffs.

As with Intelligent Octopus, customers on Ovo’s Drive Anytime tariff must give the supplier control over the exact charging schedule to access a lower rate, although they are also able to charge their car during the day.

“We’re trying to move past time-of-use rates,” Grintals explains. “We’ve seen that with dynamic time-of-use rates, there’s too much labour involved for the end consumer to deal with that. Nobody wants to check tomorrow’s price every day.

“And then the static time-of-use tariffs usually don’t reflect the full value and there’s a trade-off you need to make, which is, yes, my EV charging is cheaper but my household electricity bill may be higher and it depends on your household load profile.

“That’s what we are really focussing on – automated demand response and how do you leverage that to make propositions simpler for customers.”

A gateway drug

It’s no surprise that the most successful smart tariffs so far are for EVs, says Tom Luff, senior advisor for electricity markets and policy at Energy Systems Catapult: “If you’ve got an EV, there is value in what you’re doing, partly because you’re a big electricity user – so the savings are going to be pounds rather than pence – but you’ve also got that ability to shift and you don’t care so much over the night precisely when you’re charging.”

Schoch says their research shows EVs act as a “gateway drug” for smart tariffs and domestic flexibility: “You get an EV and not only does that have a multiplying effect on your street because suddenly a lot of your neighbours start getting EVs in the next couple of months, but also that’s the thing that opens up how consumers then engage with electricity.”

EV sales have gained significant momentum over the last year. According to the Society of Motor Manufacturers and Traders, pure EVs accounted for nearly one in three – 32.8% to be precise – new car registrations in December, overtaking petrol vehicles to become the most popular type of car in the UK. Nearly 270,000 pure EVs were registered over the whole of 2022, along with more than 100,000 plug-in hybrids.

Heat pumps also use relatively large amounts of electricity and allow for some flexibility over when exactly they run, but remain a much more niche technology than EVs. According to the European Heat Pump Association, less than 43,000 of them were installed in the UK over the whole of 2021.

The market for heat pumps tariffs is therefore “very nascent,” according to Luff: “People who have got a heat pump have gone that extra mile. They will be looking for ways to utilise them and therefore they are a bit of a captive market, but there’s still not that many of them.”

Good Energy launched the UK’s first tariff targeted specifically at heat pumps in 2020, offering cheaper electricity during certain periods over the winter. Ovo launched a type-of-use tariff called Heat Pump Pro in March 2021, although this was only available to people with a Daikan heat pump as part of a local energy market trial. And in December, Octopus launched its Cosy Octopus – a tri-band time-of-use tariff with two cheaper periods in the early morning and early afternoon, and a more expensive one during the usual evening peak in demand.

Grintals says optimising heat pumps is “significantly more complicated” than EVs because their optimal usage is partly dependent on the building in which they are installed: “Is it a retrofit? Is it a new build? All of that plays into how much heat your home can store and for how long, which affects how you pre-heat.”

“There need to be more heat pumps out there, especially in the UK, to build a good understanding to then have something like type-of-use for heat,” he adds. “We’re gathering data and looking at that and seeing how it can work but in terms of propositions a lot of it is research.”

He says the UK’s housing stock is more heterogenous and of poorer quality in terms of insulation than some other European countries where they are more popular: “It’s easier to think about it in places like Germany and the Nordics, where you might potentially even have a pre-built house on an assembly line that you just plop down and have a heat pump specifically sized for it… It’s more complicated as a retrofit solution.”

Market access

As well as the adoption of these key technologies, the proliferation of smart tariffs is also dependent on suppliers’ access to energy markets that can realise the full value of their flexibility.

At the moment, Grintals says it is really only the wholesale market where suppliers can do this without “huge barriers” as all that is really required is for customers to have a smart meter. As well as reducing consumption during periods where prices are high, domestic flexibility can enable them to refine their trading positions and avoid expensive imbalance charges.

“Up until 2025 that is where most of the value is going to come in,” he adds.

Schoch says avoiding high wholesale electricity prices driven by fuel costs for gas generators has been particularly important during the energy crisis. But as commodity costs fall, renewables continue to expand and gas generators become the marginal price setter in fewer settlement periods, balancing costs will grow in relative value.

He stresses that “we cannot take our eye of the ball,” warning: “If we’re not ready as a whole energy industry – the participants, the ESO and soon be FSO, and the control room especially, we will not be looking at the cost reductions we should be seeing.”

Schoch says the Balancing Mechanism “was fit for purpose when we had a much less volatile generation stack and a much smaller number of participants.”

The current infrastructure “simply cannot keep up” with the growing volatility and number of individual participants. He says National Grid Electricity System Operator (ESO) has recognised overhauling the Balancing Mechanism systems and processes as a top priority and acknowledges that “substantive progress has been made” but says “we must go faster”.

For example, Octopus notes that the ESO has yet to update its metering standards for the Balancing Mechanism, meaning small domestic EV chargers must have the same specifications as a large gas power station to participate.

The supplier says it faces a similar problem in the Capacity Market, which has also been set up with conventional power stations in mind.

“This poses various challenges, for instance the need to provide a long list of information per asset,” says a company spokesperson. “When you’re talking about thousands of cars, the administrative pressure really adds up. We need to try to strip back these processes to help allow for cars to contribute to the market.”

One big uncertainty in terms of where the most value will be accessible is the government’s ongoing Review of Electricity Market Arrangements (REMA). Among the changes being considered are the de-linking of gas and renewable power prices, possibly through market splitting, or the introduction locational wholesale prices on either a zonal or nodal basis.

“REMA could fundamentally change a lot of things that are happening in the market,” says Grintals. “If it goes down a path of more locational zonal, maybe even nodal, pricing that fundamentally shifts where value sits and then you could argue that a lot of the balancing and DNO value, it’s basically eaten up by how the wholesale price looks”.

Last year, Octopus commissioned a report from the Energy Systems Catapult which claimed locational wholesale prices could reduce energy system costs by £30 billion by 2035. It said this figure was based on modelling of locational price signals with a “relatively low resolution” of just seven zones and is therefore likely to be conservative. The body said more granular prices across a larger number of zones or nodes could potentially deliver bigger savings.

Zonal or nodal pricing would result in “much stronger incentives throughout the day, recognising the actual physics of the grid,” and therefore “create more opportunities to save,” says Luff.

Locational pricing is not without its critics. Generators in particular have warned that this volatility and uncertainty over prices would create new revenue risks and increase their financing costs as a result.

“I understand the arguments against it but, from a perspective of flexibility and helping customers to take an active part in a distributed energy system, having more locational and dynamic pricing that reflects what’s happening on the system is needed,” says Grintals.

He is unsure how granular these price signals should be but says there is “definitely a benefit” when compared to the current arrangements. He says understanding how much value locational price signals could unlock and how far down the power grid they should go will require greater visibility over what’s happening on the network, many parts of which are “just a black box”.

“It’s a huge challenge for us because we don’t know whether we’re doing the right thing for the specific location,” he adds. “If we did have that then I think there would be significantly more evidence and ability to say how much value locational pricing adds to the network.”

Jack Presley Abbott, deputy director for energy systems management and security at Ofgem, says the regulator is working with the government to assess market reform options but appears to be supportive of locational pricing in theory. He says in the absence of these price signals, the ESO has to “actively intervene to balance the system, paying to stop power generation in constrained areas and turn it on where it is needed”.

“Exposing retailers and other third parties to more dynamic and accurate locational signals could create the commercial incentives needed for them to drive a step-change in flexibility-focused consumer offerings,” he adds.

The results of the regulator’s assessment is due to be published later this year.

Schoch would like this approach to be taken even further with more dynamic use-of-system charges at both the transmission and distribution levels: “DUoS [Distribution Use of System charges] with the red, amber, green pricing – the problem with that approach is it kind of sets a very blunt shape for whole areas of the network which is not truly cost reflective”.

“The challenge is that now red, amber, green has been instituted, there’s a big chunk of industry that then wants to sit on its laurels,” he adds.

“The reality is different networks across the UK, they cannot build network fast enough to keep up with load growth and that’s where a big chunk of cost is going to hit consumers over the coming years.”

He says half-hourly use-of-system charges would enable networks to maximise their usage of available capacity, particularly at the lower voltages where most of the load growth is happening.

However, change on this front looks far less likely, according to Presley Abbott. In November, Ofgem paused work on its significant code review (SCR) of DUoS charges, which was spun off from its earlier SCR of forward looking charges and network access arrangements.

“We consider that the methodology underpinning DUoS charges could be made more cost-reflective, and that it warrants a review, however, given the longer term nature of these changes, we intend to defer this work in the immediate term,” he explains.

“Our work to date, ruled out dynamic real-time pricing in DUoS charging, which would effectively be sending short-run marginal cost charges, as we have concerns of the efficiency of this approach due to the difficulty in accurately setting real-time charges. We will re-visit this when the DUoS work is restarted, but have no evidence to show that this will change.”

There are other ways in which customers can be rewarded for helping to manage constraints on local electricity networks. Distribution network operators (DNOs) have for a number of years been holding tenders for flexibility services, which are now starting to feature flexibility from domestic customers.

More than two thirds of the roughly 350MW of capacity awarded contracts in UK Power Networks’ flexibility tender in 2021 was from smart electric vehicle charging. The main winners were Octopus Energy and Electric Miles, which also won a number of contracts in UKPN’s subsequent tender last year.

Despite these recent successes, Grintals says DNO flexibility tenders are a challenging market to operate in at the moment as there is “a lot of admin and annoying work for little value”.

He says residential portfolios are in a state of flux. “You never know when those assets are going to come in,” making it risky to bid for longer contracts.

DNOs also run their tenders in slightly different ways. They are making moves standardise processes and contracts, including through the Open Networks projects, and all those except National Grid Electricity Distribution (formerly Western Power Distribution) are now operating tenders via the Piclo Flex platform.

“We expect more alignment between DNOs so that we can take one approach and enter different markets and automate that as much as possible,” says Grintals. “Currently a lot of it is Excel spreadsheets and manual data entry.

“If you’re thinking about millions of assets, I don’t see anyone doing that.”

Half-hourly settlement

In April 2021, Ofgem finally go gave the go-ahead to the implementation of its market-wide half-hourly settlement programme, having already delayed the decision three times over the previous three years.

The regulator announced that the requirement for suppliers to half-hourly settle domestic customers would come into effect in October 2025 and appointed Elexon to manage the programme.

Although the programme will update the settlement arrangements to make them faster, more efficient and better able to handle the huge volume of data that will be created, elective half-hourly settlement has already been possible for domestic consumers since 2017.

However, more than half a decade later, only 10% of domestic consumers are currently settled on a half-hourly basis, says Schoch. “For the industry, market-wide half-hourly settlement will definitely be a big accelerator,” he adds.

“One thing which cannot be underestimated is actually having the technology platform and system which can actually launch, bill and communicate smart tariff value propositions.”

Elective half-hourly settlement requires suppliers to “go above and beyond” and “so far we’ve not seen not seen that much of it,” says Luff.

“Having all consumers on half-hourly settlement across the market should be a good milestone, allowing more of these tariffs to come onto the market and to be of value,” he adds.

“It’s a quantitative barrier in that once you’ve got everyone on smart meters and half-hourly settlement, you’ve got more people to choose from and more likelihood of people taking them up.”

Grintals says the fact settling half-hourly is still the exception and not the rule is a problem even for those that can and do. If a half-hourly settled customer attempts to switch to another supplier without this capability, they will be told the switch cannot be completed.

This problem can ultimately be resolved by the losing supplier by withdrawing the customer from half-hourly settlement before the switch is attempted again, but Grintals says this is a poor experience and can lead to complaints: “There’s value from doing half-hourly settlement but the way the process is set up now, there’s a flaw.”

Awareness and buy-in

Although there remain a number of obstacles to progress, Schoch is optimistic about the prospect for smart tariffs in the near future. He says the energy crisis has “significantly accelerated awareness around electricity use, gas use, and combined with the electrification of more and more parts of our lives, make this a very opportune time”.

“I expect we will see significant growth in smart tariffs over the coming years,” he remarks.

He says for the growing number of EV drivers especially, the potential savings have become hard to ignore: “Suddenly you’re looking at over £1,000 savings from moving from a flat tariffs to a smart tariff over a year. That’s not an amount of money you would turn away. We’re not talking about saving a fiver a month.”

Schoch says the increased awareness of, and interest in, energy is demonstrated by the levels of participation in the ESO’s new Demand Flexibility Service (DFS), which he hopes will be continued in some form in the future.

The service is targeted at getting customers to move their consumption outside of the few peak hours on weekdays evenings when the strain on the energy system is at its greatest.

“It’s an interesting space to get people educated about the flexibility and the value of shifting load from one time another and you can start building a more aware customer base,” says Grintals. “The DFS has been a great example of shifting their thinking.”

For many customers this has meant changing when they run appliances such as washing machines, dishwashers and cookers – all relatively small loads when compared to EVs and heat pumps.

Some real enthusiasts went all in, even going so far as to turn as to switch all their lights off and spending an evening in romantic candlelight as they made a game of getting their energy usage as low as possible. Clearly this is not something the average person will want to do on a regular basis.

Automation will be key for these smaller loads where the savings of shifting consumption will be relatively little. There are a growing number of devices that have smart capabilities and Octopus’ website now lists a number of brands whose products can connect to its Agile API (application programming interface).

However, Luffs says smart thermostats and automated appliances are not quite mainstream yet and “the retail offering bringing all of those together isn’t quite there”.

Green Energy UK was first supplier to launch smart time-of-use tariff back in 2017. Named Tide, the tariff has four price bands on weekdays and two on weekends. They include Low Tide bands offering cheap overnight electricity and a High Tide band covering the expensive evening peaks on weekdays.

The company’s co-founder and chief executive, Doug Stewart, is sceptical about the ESO’s Demand Flexibility Service, recounting a conversation he’d heard recently on a radio chat show. One of the presenters said he’d made “all of his children and his wife stop consuming things” during one of the events and had become “very unpopular” with his family as a result: “His colleague was a little bit disparaging about the massive saving of 80p he’d made”, Stewart recalls.

“In the middle of an energy crisis when people are paying two-and-a half, three thousand pounds for their electricity, saving 80p on a Monday evening isn’t really good,” he says. “It’s not life changing and it’s not a big enough incentive.

“Whereas trying to get people to change their behaviour on the basis of not building another bloody coal fired or gas fired power station, I believe is a much better incentive.”

Stewart blames a myopic focus on saving money for many of the current ills of the retail market and says there needs to be a cultural shift in mindset so people appreciate the value of energy and the impact of their usage on the energy system and the environment.

Luff says this will be important for some people and there are changes that could be made to leverage environmental concerns.

Although people are being sold supposedly 100% renewable tariffs, the reality is they are getting their power from the same grid as everyone else, which is still heavily dependent fossil fuel generation. He says a “much more granular way of tagging electricity generation minute-by-minute means you could have much more accurate green tariffs and by doing that you could send signals to people that at certain times of the day this is when it’s cleaner to use energy.”

But he says while it is great that environmental concerns are helping to getting this kick started, “at the end of the day for the mass market, I think experience would say people will look for what’s cheapest and they don’t go for the environmentally thing if that comes at a cost”.

He adds: “Just from a moral perspective, at the lower levels of income you need to make sure that you’re not excluding people from making those choices because its more expensive. It fundamentally needs to be a financial driver.”

Despite delays, smart meters have become common and EV sales are gathering pace. The power grid is increasingly under strain on both the supply and demand side. Energy is on the front pages and a major concern for many people. The potential for smart tariffs to help solve the country’s energy issues is increasingly obvious. But for the time being, smart tariffs still seem to be a relatively niche product for enthusiasts and early adopters.

For the foreseeable future, the growth of smart tariffs is likely to be tied to the proliferation of technologies such as EVs and heat pumps – large flexible loads that offer the greatest potential value. However, progress is also being held back by suppliers’ inability to access this value. Unlocking energy markets will enable suppliers to create truly compelling propositions for customers and provide the means and motive to overcome some of the other barriers to progress.

Case study: Agile Octopus

Electricity prices for customers Octopus’ Agile tariff are set on a daily basis between 4pm and 8pm (usually at 4pm). The rates are indexed to prices on the wholesale market through a set formula.

When there is a surplus of power, perhaps on a particularly windy day, these can include negative prices, meaning customers can sometimes get paid to consume electricity. They are alerted to these Plunge Pricing events in advance by text, email or Octopus’ app.

Octopus has also created an open API that can feed price data to smart devices so they can respond accordingly based on customers’ preferences. The company’s website lists a number of brands with compatible devises including Tado, Next, Hive, D-Link and Whirlpool.

There is additionally an Agile version of Octopus’ solar storage export tariff enabling customers to benefit from high prices by selling back to the grid.

The energy crisis over the last year or so has seen the high prices pushed to extremes.

Schoch says they have not changed their pricing formula but they have increased the upper limit: “When we first introduced Agile, we had a 34p/kWh cap. We have had to raise that considering when was Agile was first launched in 2018, 34p/kWh was in order of three times the average, and so we’ve had to increase it a few times over the course of the energy crisis”.

Their website now warns consumers they could pay up to 100p/kWh, although this is before the government subsidy offered as part of its Energy Price Guarantee (EPG), which is phased in as prices rise above the EPG base rate of 34p/kWh.