With a number of energy suppliers having launched their first-ever nationwide Time of Use (ToU) tariffs, momentum is beginning to build around a new pricing structure that will transform the way we are supplied and use our energy in the UK. Though still very much in their infancy, ToU tariffs are a huge development in the energy sector, and, along with smart meters, are seen as pivotal to the UK government’s net zero carbon goals and the creation of a smarter energy grid.
So why haven’t more energy suppliers launched their own ToU tariffs? The fact that the tariffs require customers to be on a smart meter, and the rollout and acceptance of digital meters has been slower than anticipated is one very good reason. There are also other stumbling blocks. The market is quite simply not ready. Behavioral change in the way people use energy is required. But before we look at these challenges in more detail, and the solutions to address them, let’s take a quick look at what a ToU tariff is and the potential size of the market.
The benefits of Time of Use tariffs
Aimed at both UK businesses and households, these smart-meter enabled tariffs are designed to incentivize customers to use more energy during off-peak periods, and less of it when supply is low or demand is high. Fewer people drawing power at peak times means less likelihood of supply shortages, plus a better ability to use all the renewable energy produced in this country – from wind turbines, hydro and solar power. This will ultimately lead to a smarter, cleaner and more efficient grid.
That’s why ToU tariffs are seen as vital in the fight against climate change. The UK government has committed to the country reaching net zero carbon emissions by 2050, and as part of this commitment, all UK households and micro businesses must have been offered a smart meter by their energy supplier by 2024 – although this deadline may be delayed as a result of the Coronavirus pandemic.
A ToU tariff offers customers cheaper electricity when demand and energy prices are at their lowest. How does this happen? The household’s or business’s smart meter monitors prices and this data can be used to move energy use to cheaper periods – helping to avoid peak rate prices. Customers are therefore empowered to lower their bills – to save money and contribute to a more sustainable environment.
The UK government estimates that this smart system will be worth £40 billion in savings to Great Britain by 20501, with much being passed on to consumers. So how receptive are British people to the new tariffs?
A receptive market
A lot of research has been conducted into how receptive British consumers are to converting to a new ToU tariff. The good news is, the market appears very receptive – although, as mentioned, there are a number of obstacles to overcome. But we’ll get to those later.
According to Citizens Advice, surveys show that 20% of consumers would choose a ToU tariff. In its trial, some 75% of users said they were happy with the tariff. In addition, the average reduction in peak demand electricity for participants in its trial was between 5-10%2. They found that households could save £5 a year with ToU tariffs, which adds up to some £19 million a year nationally. Interestingly the survey also revealed that people found it hard to react to half-hourly price changes, and therefore suggested that a change in behavior is needed for customers to reap the maximum benefit.
In a survey experiment conducted by researchers at University College London, Energy Research and Social Science paper, on British energy bill payers which presents the results of a survey experiment conducted on a national representative sample of 2020 British energy bill players, the data suggests that over a third of bill payers (39%) are in favior of switching to a ToU tariff, indicating a sizable potential market.
But, as Citizens Advice points out, how quickly consumers take up and adapt to these new tariffs will ultimately depend on changes in consumer behavior.
What’s your strategy?
For energy suppliers, the answer lies in behavioral science. It is one thing to create a set of tariffs and technologies that aim to change the timing of consumers’ electricity use, it’s another to educate customers on the benefits of doing so, and to motivate them to change their behaviors to suit the new tariffs. Energy suppliers need to work harder to get their customers informed and on-board – to change their habits in order to be in a position to sign-up to the new tariff and maximize reduction in their bills having done so.
Of course, another required step in the process of transferring to a ToU tariff is to motivate consumers to have a smart meter installed. There are currently 14.3 million smart meters operating across homes and businesses in the UK, which is still a long way off the Government target of replacing all 50 million of Britain’s analogue meters.
The solution – behavioral science and data science
Behavioral science based customer engagement programs offer a solution. The Advizzo SaaS platform uses both behavioral and data science to deliver personalized home usage reports directly to customers. The reports are designed to trigger sustainable behavioral changes through tips, advice and comparisons to help reduce energy consumption.Advizzo’s customer engagement programs can also help suppliers make positive inroads into their sustainability goals, by encouraging customers to accept smart meters, changing behaviors and energy use, and swapping tariffs. If you’d like to find out more about our behavioral science based customer engagement programs for utility and water companies, then why not take a look at some of our case studies, or get in touch today.
Sources
1 https://www.sms-plc.com/insights/blogs-news/smarter-energy-consumption-on-the-rise-with-introduction-of-time-of-use-tariffs/
2 https://www.citizensadvice.org.uk/Global/CitizensAdvice/Energy/Citizens%20Advice%20summary.pdf
3 Demand Side Response in the Domestic Sector—A Literature Review of Major Trials Frontier Economics and Sustainability First, London (2012)
4 C. Defeuilley Retail competition in electricity markets Energy Policy, 37 (February (2)) (2009), pp. 377-386
5 Closing the efficiency gap: barriers to the efficient use of energy by E. Hirst, M. Brown