NEWS

A new way for consumers to pay for electricity could alleviate strain on the industry, encourage better habits and make smart meters more beneficial.

The energy industry needs to incorporate renewables into the energy mix on a much larger scale as part of its drive towards net zero. This requires some management of demand. Thanks to some logical thinking, there is now a solution that nudges consumers in the right direction rather than punishing them. It’s time-of-use tariffs – and the smart meter makes it possible.

In this article, we’ll look deeper at time-of-use tariffs – what they are, how they work and why we need them. We’ll also look at how smart meters make time-of-use tariffs work.

What are time-of-use tariffs?

Time-of-use tariffs are tariffs that consumers can sign up to with selected electricity providers. Not all providers offer time-of-use tariffs at the moment. Also, they are not available for gas.

It is a flexible tariff where the customer pays a different price for their electricity depending on the time of day they use it. The price per Kilowatt-hour will be lower during off-peak periods, such as the evening and night. There could be many different rates valid across the day.

This is not a totally new idea. Economy 7 tariffs that encouraged people to charge their storage heaters at night have been around for years. They faded away as the country has moved away from coal power (the idea was to get consumers to use power that would have been wasted, as coal-fired power stations work 24/7). But now, they’re back in the form of time-of-use tariffs.

How does it work?

The electricity provider sets different rates for their power across the day. Lower rates apply for off-peak periods when demand is lower. For example, a customer would pay less to run their dishwasher at 2 am than one running theirs at 3 pm. The industry hopes that the prospect of a discount may make you change your habits and spread out your electricity consumption more.

On some time-of-use tariffs, prices could go up or down in line with the wholesale market electricity price. An example of this happened in December 2019, when customers on Octopus’ Agile time-of-use tariff were actually paid to use electricity during some specific overnight hours. This was because it was an extremely windy day and wind-farms were generating more electricity than was needed. Rather than switch off the wind-farms, it made sense to pay consumers to use it.

Why do we need time-of-use tariffs?

As part of the drive towards net zero carbon emissions, many of the UK’s coal-fired power stations have been closed down. Replacing the amount of power we used to get from coal with renewables such as wind and solar energy is a massive undertaking, which is putting a strain on the industry. Solar panels only generate power during the day, while wind power is dependent on there being enough wind. Encouraging consumers to spread out their electricity use, rather than having peaks and troughs, helps the industry manage supply better. It means consumers use more renewable energy and fossil fuel-based power stations need to be utilised less often.

As well as alleviating the pressure on the grid, time-of-use tariffs can help customers save money and make use of their smart meters. The industry has spent a lot of time and money installing smart meters (with more still to do) and time-of-use tariffs help show consumers what they can do in practice.

Benefits for consumers

The type of consumer who will benefit most are people who have flexible lifestyles, who can use their dishwasher and washing machines at night rather than at times when everyone else is using them.

In a post-COVID world, when more people will be working from home, this could be more and more people.

During trials, the average reduction in peak-time electricity consumption was 5%. Households could save £5 with no change in behaviour at all. With a few changes in habits, savings could be considerable.

Benefits of time-of-use tariffs for home battery owners

Another benefit of time-of-use tariffs is that they encourage consumers to invest in home battery storage, or if they already have storage available, to make more use of it.

If you have a home battery storage system, you can take a time-of-use tariff, charge your battery overnight when prices are at their lowest, then use that power over the next day. Any electricity you do not use, you can feed back to the grid.

Electric car owners could also take advantage of time-of-use tariffs in this way.

The role of smart meters

time-of-use tariffs can only work in homes with smart meters. Traditional legacy meters do not have the capability to deal with real-time changes in price and consumption.

Smart meters automatically administrate your time-of-use tariff, communicate wirelessly with your supplier, and respond to variable pricing. It also shows you how much electricity you are using at any specific time, rising and falling in real-time. This helps you understand how much you are paying and know when it’s time to shift your consumption to a time where prices are lower.

As more and more consumers get smart meters in their home (the aim is for every home and business in the UK to have one by 2025), more will be able to benefit from time-of-use tariffs.

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