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Winners and losers of policy reform on electricity tariffs

16 December, 2020

Winners and losers of policy reform on electricity tariffs

Jacopo Torriti

Clare Downing

Aimee K Eeles

Case study   Flexibility

Jacopo Torriti, Clare Downing and Aimee Eeles

The energy supply industry is installing smart meters for its customers and more people are investing in smart home technology. Alongside these changes, Ofgem (the regulator for the energy markets) is reforming electricity ‘settlement’ – the process for charging suppliers for the difference between how much energy they purchase, and how much their customers actually use.

This is a key change in the way electricity pricing works. Currently, most customers are settled on a “non-half-hourly” basis using estimates of when they use electricity, based on a profile of the average consumer usage and their own meter readings (taken over weeks and months). The implementation of Market-wide Half-hourly Settlement reform is a key enabler of the move to a smarter, more flexible energy system. Ofgem expects Market-wide Half-hourly Settlement to incentivise suppliers to develop and offer innovative products such as Time-of-Use (ToU) tariffs. The ToU tariffs are estimated to save UK residential customers between £1.6 billion and £4.6 billion from 2021 to 2045Opens in a new tab. Whilst the overall impacts of this major energy policy reform are high, prior to CREDS research there was no estimate of which consumers would gain or lose financially from the half-hourly settlement.

The research within CREDS’ Flexibility theme focuses on the winners and losers of Time of Use (ToU) tariffs, i.e. how much consumers will benefit from or pay for, new flexible electricity tariffs where the cost of electricity varies at different times of the day.

  • Researchers at the University of Reading developed clustering techniques enabling a classification of residential electricity demand based on consumption during peak periods and analysed the impacts of ToU tariffs on different types of customers.
  • The methodology makes use of half-hourly smart meter data and the 2014-2015 UK Time Use Survey data as a basis to analyse the distributional effects of ToU tariffs in terms of customer segmentation, peak to off-peak ratios and synthetic profiles.
  • The findings reveal regional and socio-economic differences (e.g. positive effects for high income groups in London) and household composition similarities (e.g. positive effects for households with children not in the high-income group).

Researchers from Reading have been working closely with Ofgem to feed in the results from their studies and support Ofgem’s policy development process. Engagement has consisted of the following activities:

  • Sharing relevant and useful research about the distributional impacts across consumer groups of ToU tariffs, with the Ofgem team.
  • External peer review of the assumptions underpinning our analysis on load shifting that is included in the draft Impact Assessment.
  • Meetings with the Ofgem team to ensure the research findings were appropriately cited in the draft Impact Assessment.
  • Involving one of the team, Abid Sheikh, as an Advisory Board member for the parallel research project – Distributional Effects of Dynamic Pricing for Responsive Electricity Demand (DEePRED).
  • Advising on general policy reform of Half Hourly Settlement as part of Professor Torriti’s membership of Ofgem Academic Panel.

Ofgem has made direct references to this work in the draft Impact Assessment that supports the Market-wide Half-hourly Settlement policy reform.

Project team

Future plans

We are planning a webinar to present the main findings of the two publications related to this research as well as continued support to Ofgem on their final business case of the Market-wide Half-hourly Settlement policy reform.

Sources of information

Quote

The work developed at the University of Reading has offered unique value and insight, assisting us in developing the case for reform, which will affect all residential (and small non-domestic) consumers. Ofgem testimonial as part of the University of Reading REF Impact Study.

Publication details

Torriti, J., Downing, C. and Eeles, A.K. 2020. Winners and losers of policy reform on electricity tariffs. Centre for Research into Energy Demand Solutions. Oxford, UK. CREDS case study.

Banner photo credit: Alireza Attari on Unsplash

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