Unit 3 Micro: Time of Use Pricing for Energy

When is electricity demand highest in the UK? The answer comes at the end of the blog!

The UK government is committed to the rolling out of smart energy meters between now and the end of 2020. Millions of homes will have smart meters installed which track how much electricity you use and when you use it - the installation cost is approximately £350 per unit although this may come down with the utilisation of economies of scale. Smart meters will give consumers and the utility businesses minute-by-minute information about energy consumption and this could fast-forward the launch of time of use pricing tariffs for us all in the years ahead. It will mark a move away from flat-rate tariffs towards fully-fledged peak and off-peak pricing.

At the moment around one in ten households are on Economy 7 tariffs which offers lower prices for electricity used during off-peaking times in the late evenings and early mornings. Economy 7 seems to have been around for as long as CEEFAX and if you understand that you are giving your age away!

There are several economic arguments for time of use pricing providing that consumers are properly aware of what the pricing tariffs are and how they might be able to benefit from them.

It makes sense for prices to be lower during the night when the UK electricity generating network is operating with spare capacity. Savvy households will be able to re-organise the timing of using their major appliances and save money. Fewer people will leave their appliances on standby (a deadweight loss of scarce energy) if they know what the financial cost is. And advances in technology in power storage heaters and immersion heaters ought to mean for example that water heated up at night at lower prices can be utilised effectively during the day without the need for re-heating.

On the other hand, critics claim that large working families do not have such flexibility and might end up paying higher average tariffs when their washing machines and hot water boilers are working flat out to meet the heavy demands of a growing family. They are also concerned about the amount of private data that can be stored on these meters and they doubt whether electricity supply companies will necessarily pass on savings to consumers in the form of lower prices.

Time of use pricing is common in many other countries, the example I give below comes from Ontario in Canada.

Ontario Pricing Example:
Current smart meter time-of-use rates for summer:

1/ Weekends & Holidays - All Day - 5.9 ¢/kWh
2/ Summer Weekdays (May 1 to October 31)

7 am to 11 am - 8.9 ¢/kWh
11 am to 5 pm - 10.7 ¢/kWh
5 pm to 7 pm - 8.9 ¢/kWh
7 pm to 7 am - 5.9 ¢/kWh

It may not be too long before it becomes routine to set the timer switches on all of our washing machines, tumble dryers, dishwashers and immersion heaters so that they switch on only when the rate is lower. Is the approach of charging more to boil a kettle for a cup of tea when everyone else is doing so (for example at half time in the football or during a break in Coronation Street) equitable? Will greater use of the price mechanism be a sufficient incentive for consumers to alter their behaviour in ways that enhance sustainability?

Or will it just bring even greater confusion in the market place and risk hitting vulnerable groups with older appliances ho have little choice about when their consumer durables are switched on and off?

The answer to the question: When is electricity demand highest in the UK? Answer: between 5pm and 7pm on weekday nights!

BBC news video: The smart way to consume energy?
BBC news video: How a smart meter works
BBC news: Smart meters ‘must not deter switching’