Time-of-use tariffs: The hidden benefit of smart meters

Photo: utilityweek.co.uk

The smart meter roll-out has received much attention in recent months, with scrutiny over costs and delays; concerns around privacy and security; and scepticism of the anticipated benefits.

Much discussion has focused on how smart meters provide accurate billing, up-to-date usage information, and put an end to manual meter readings. However, smart meters will also enable time-of-use tariffs, which many experts consider a key benefit of smart meters. In the long-term, time-of-use tariffs have the potential to improve grid reliability, facilitate the integration of renewable energy, and reduce costs for consumers and energy suppliers.

What’s a time-of-use tariff?

The idea is a familiar one: think about peak and off-peak mobile phone pricing, or peak and off-peak train tickets. Customers pay a different rate depending on time-of-use, so you might pay 10p/kWh during regular hours, but 5p/kWh between midnight and 6am, and 25p/kWh between 4pm and 7pm. The aim is to incentivise consumers to change their electricity demand to meet supply capacity, rather than changing supply to meet demand. Some households have been using a type of time-of use tariff for decades: Economy 7 or Economy 10 tariffs, which offer cheaper overnight electricity. However, these households need two electricity meters, one that records consumption during overnight off-peak hours, and another meter for peak hours.

With smart meters, energy companies will have energy use data at 30 minute intervals, enabling them to introduce time-of-use tariffs without installing multiple meters.

Why is this important?

Demand for electricity varies significantly throughout the day and across seasons. Energy suppliers need to ensure peak demand can be met – which includes paying for “peaking” gas and diesel power plants, used only for a few hours a week or even several hours a year. If time-of-use tariffs can reduce peak electricity demand, then we will require fewer ‘peaking’ power stations – reducing the financial and environmental cost of electricity.

Time-of-use tariffs will be even more important as more renewable power is installed. A significant challenge of wind and solar energy is ‘intermittency’ – wind turbines and solar panels don’t generate electricity if the sun doesn’t shine and the wind doesn’t blow. With time-of-use tariffs, energy companies could offer very low prices when the wind is blowing and sun is shining – incentivising consumers to use electricity when it’s cheapest and greenest.

Furthermore, as electric vehicles and electric heat pumps grow in popularity and require more electricity, the importance of flexible demand becomes even more crucial. Reducing peak demand could avoid or defer infrastructure upgrades, which would otherwise lead to increased costs for electricity distribution and transmission.

What’s the catch?

Time-of-use pricing will increase the cost of using energy during peak hours, so if a consumer primarily uses electricity during peak hours and does not shift some use to off-peak periods, they would face higher energy bills on a time-of-use tariff. It’s easy to convey this message in a negative light – for example, “time-of-use tariffs will charge you £5 to boil your kettle during peak hours” – so you can imagine why policy makers and energy companies might avoid discussing time-of-use tariffs alongside smart meters.

So when can I get a time-of-use tariff?

A handful of companies are already offering time-of-use tariffs alongside smart meters. British Gas has introduced a ‘HomeEnergy FreeTime’ tariff, which offers free electricity on either Saturday or Sunday. Green Energy now offer a ‘TIDE’ tariff, with three tiers of pricing: Low, Weekday/Weeknight, and High price. Ofgem is looking to introduce ‘half-hourly settlement’ to the domestic electricity market, and when this happens, household time-of-use tariffs will likely become more common.

The current scrutiny over smart meters is important and warranted: it is a costly programme, with significant implications on cost of energy, security of data, and compatibility of technology. But amid current criticisms of smart meters, it is worth remembering that smart meters will enable us to move towards a smart grid future – one which will help us make the most of renewable energy. Over the coming months and years, keep an eye out for time-of-use tariff offerings. If you can shift electricity use from peak periods to off-peak periods, then time-of-use tariffs may be a great option – it’s a win-win situation, resulting in lower energy bills while improving the reliability of the electricity grid.

Yi Jean

Community Champion