Time-of-use tariff growth will squash demand diversity, warn network leaders

Senior energy network figures have told Utility Week that significant growth in time-of-use tariffs will bring an end to diversity of demand for networks and challenge their ability to maintain reliable supplies.

These cautions were issued during interviews to inform Utility Week’s new report, Market-wide settlement reform: a moment of opportunity? in which anonymised leaders from across the energy industry shared their expectations about the extent to which the arrival of market-wide half-hourly settlement (MHHS) will unlock valuable industry change and contribute to the net zero transition.

The report, published in association with engineering and technology consultancy Expleo, highlights a range of anticipated benefits from the introduction from MHHS, but also highlights key dependencies for these as well as potential associated risks.

In terms of benefits for networks, expert contributors expected the explosion of half-hourly consumption data that will come with MHHS to support a more granular understanding of network utilisation. This should in turn promote better investment planning, they said.

Furthermore, there are hopes that MHHS will act as a “catalyst for deriving value from flexibility at a domestic level” and help networks source the flexibility they need to secure the regulatory rewards on offer if they can meet asset deferral targets in the current price control period.

However, network leaders contributing to the report were also anxious about their ability to manage some challenges which will accompany the arrival of MHHS. This included its propensity to flatten diversity in domestic demand profiles should an expansion in the availability of  time-of-use tariffs – which many expect as a result of MHHS – successfully capture consumer interest.

“Effectively, flexibility will become a major challenge because it will drive overloads that are purely driven by flexibility – not load growth, not low-carbon technologies,” said one network industry veteran and energy flexibility expert.

“If someone comes up with a killer proposition and there is high-level uptake, DNOs could find themselves on the back foot trying to deal with that.”

They added that this scenario would effectively bring an end to “diversity of demand on our networks”.

Another senior figure with responsibility for one of the new Distribution System Operators agreed that growing consumer engagement in energy flexibility, driven by wholesale market price signals, will bring challenges.

While acknowledging that MHHS and demand side flexibility are essential for a cost effective transition to net zero, they added: “We need to do some work to make sure we can balance what is good for the networks and what is good for the system.

“If we want to open the Pandora’s’ box of flexibility then we need to make sure there are appropriate caps and collars.”

One of the more immediate impacts of MHHS on networks, according to our industry sources is that growing engagement with time of use tariffs will make existing approaches to calculating maximum demand on distribution networks redundant.

Currently, networks rely on a formula called After Diversity Maximum Demand or ADMD.  Said our senior DNO source: “It assumes that, if you take a certain street as an example, and assume that people behave in a certain way, the maximum load will be X.

“After MHHS, this will become a thing of the past…there are a number of innovation projects being spun up at the moment to prepare for this.”

The concerns aired here about potential unintended consequences for grid stability from growing engagement in demand side flexibility also come as Ofgem considers responses to its call for input on the future of distributed flexibility and its developing position on regulation of flexibility markets. This call for input closed in May.