Smart and fair domestic electricity pricing

In an article first published in New Power (Issue 90, August 2016), Jon Bird, Sustainability First Associate, looks at the result of time-of-use charging trials in energy and water and finds there are winners and losers in making the transition.  It may be impossible to make it fair for everyone, but we must tackle the extremes.

Elective and mandatory half-hourly settlement (HHS) for domestic electricity customers, locational pricing for transmission losses, distributed generation embedded benefits, the future of distribution use of system charges – these are all currently being discussed as we head to a world of smart meters and smart electricity pricing for domestic customers.

What they all have in common is the aim of making different elements of the final electricity price more reflective of the actual input costs that go to generate and deliver the electricity to a particular customer.  Economic theory tells us that cost-reflective pricing provides the most efficient system as a whole, as well as the best incentives on retail customers to change their behaviour to keep their own costs as low as possible.  But does this work in practice and is it fair to all customers?  This is the subject of a recent paper by Sustainability First Associate, Jon Bird[1], and topic for a Sustainability First roundtable held on 13 July 2016.

Whilst these initiatives will increase cost-reflectivity for suppliers, their impact is diluted by the increasing proportion of the bill that goes to cover the social and green levy costs.  End-prices might also need to become more location-specific if they were to reflect the actual costs of dealing with a more decentralised electricity system.  Moreover, they are all costs faced by an electricity supplier – and not directly by the electricity customer. How the supplier turns these into a final retail tariff for the customer will be up to it and will depend on its own marketing priorities.  One major retailer is offering a new FreeTime tariff – with free electricity on Saturdays or Sundays. This is not strictly cost-reflective, but nevertheless aims to reduce weekday peaktime load.

Several recent trials of a time-of-use (ToU) tariff in the UK and Ireland have shown, on average, a positive response in terms of a reduction in peaktime use of electricity.  But more work is needed to see if bill reductions from peak-shifting can be replicated amongst all electricity users (not just trial customers) – particularly given the CMA’s concerns that many customers currently do not react to a much larger bill saving they could achieve by switching tariff.

Any change in approaches to pricing creates winners and losers.  This has occurred in the water industry, when water metering and charging by volume was introduced in water-stressed parts of the country.  Using data from the ToU trials shows that, whilst on average for each demographic group, the potential impact of introducing ToU tariffs (leaving aside any possible behaviour change) is small, there can be wide variability within demographic groups.  This needs exploring in more detail and indeed Ofgem has recently commissioned some work to explore just this.

One way to seek to avoid significant losers among retail customers is to make any change voluntary.  This is behind Ofgem’s push for elective HHS.  In this situation, a customer and their supplier could agree to move to HHS with a corresponding change in retail tariff.  But this would only be attractive to those customers likely to gain financially.  This would encourage suppliers to search out those customers at the expense of the remainder who would, assuming no change in the overall cost of supply, end up paying more.

A similar problem arises if the costs faced by a supplier become more cost-reflective, but customers can choose to remain on a standard p/kWh flat tariff.  In this case, customers who use more electricity than average during peak times would lose money by changing tariff.  So they would wish to stay on their flat tariff.  Some of these may be customers in fuel poverty who have little ability to shift consumption behaviour. But others may have high discretionary peak-time use, such as electric vehicle charging. These customers could be persuaded to move to off-peak times – or could opt to pay more for their peak-time use.

There is no easy answer that is fair for every customer. Policy makers need to be aware of the possible consequences for customers in advance of any change to half-hourly settlement – and find ways to deal with them.  The general view in our Sustainability First workshop was that it will be important to keep down the overall cost of power supply and therefore to continue towards greater cost-reflectivity in supplier charges – and also, to some degree, for customers. However, any problems and unintended consequences for customers will need to be addressed. In the end, it may be that we cannot come up with an approach which is fair – and seen as fair – for everyone. But we should at least be able to tackle areas of extreme unfairness – such as customers who are in fuel poverty with inflexible peak-use, or, at the other extreme, those customers with large peak-time use which may be largely discretionary.

There will need to be an informed stakeholder discussion on these fairness issues as we move towards half-hourly settlement, to enable a common understanding of the issues and explore  whether an element of consensus can be built around the way forward.

[1] “Smarter, fairer? – Cost-reflectivity and socialisation of costs in domestic electricity prices” http://www.sustainabilityfirst.org.uk/index.php/other-publications

New-Pin : Governance and the Public Interest in a post-Brexit World

As summer turns to autumn, the size of the task following the Brexit vote has come into sharp relief.  It will be some time before there is another ‘natural break’ to step back and take stock.

The new government has multiple and pressing issues to deal with.  Negotiating Brexit is clearly top of the agenda.  Continuing to align UK climate policy with the 2015 Paris agreement provides an opportunity to strengthen our position as a world leader in sustainable energy policy and environmental protection.  However, from a sustainability point of view, addressing the issue of why people voted as they did is also crucial.

Understanding why people felt left out and left behind, and then working out what to do about it, will be important if the Brexit negotiations and the new Government are going to meet raised public expectations.   Bridging the divide between communities, regions and nations – as well as between the young and the old – will be a long-term and difficult process.

Early indications suggest a certain pragmatism by the new Government. Concrete steps that start addressing social divisions will be needed.  Similarly, practical changes that can start to genuinely empower citizens and communities will be required.

June’s referendum delivered a strong signal on the need we all often feel for more ‘control’ in our lives.   This extends beyond the desire for a political voice in our communities but also to having a say in how corporations are run and behave.

Ensuring that the public voice can be properly heard in the day-to-day services that we all use and rely on would be a good place to start.

Energy and water services fall squarely into this camp.  Demonstrating that companies in these sectors are responsive to people’s needs and provide services that are affordable and sustainable – both for current and for future generations – is vital to build confidence that the companies and their regulators work in the public interest.  Similarly, ensuring that the long-term strategic investments that shape these services take the views of citizens and communities into account is key if trust in decision-makers is to be maintained.

Over a year ago Sustainability First set up the New Energy and Water Public Interest Network (New-Pin) precisely to tackle some of these questions. The Network brings together consumer, citizen, environmental and public interest groups with regulators, government representatives and companies. It seeks to ensure that a long-term public interest ‘voice’ is better heard in these services.  In our post-Brexit world, the New-Pin project is now more relevant than ever.

In October, for the fifth New-Pin project paper and workshop, we will be exploring how best to actively engage consumers, citizens and other stakeholders in the energy and water sectors, particularly on the hard questions and answers that need to inform difficult decisions and trade-offs for the long-term.   The papers will be posted on the Sustainability First website in the late autumn.

But stakeholder engagement is meaningless if it doesn’t help shape decision-making in practice.  Shortly before she became prime minister, Theresa May said ‘I want to see changes in the way that big business is governed’ noting that many boards are drawn from the same ‘narrow social and professional circles’ as the executive team.  She went on to add ‘So if I’m prime minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but workers as well’.

In the year ahead, the New-Pin project will look at the public interest and board-level governance of the energy and water companies.  We will explore with company chairs and independent non-executive directors how they bring the views of consumers and citizens to the board table and how they reflect the long-term public interest in reaching their Board decisions.

This autumn, Sustainability First will begin by asking public interest groups what questions they think we should be putting to energy and water company board members.   If you’d also like to suggest some issues that you think we should explore in our planned board-level conversations, we’d be delighted to hear.

Sustainability First is pleased that our New-Pin project will offer some practical tools to public interest advocates, as well as to the water and energy companies and to their economic regulators, to help them tackle some of the big questions raised by the prime minister about how to ensure a country for everyone. Through New-Pin, Sustainability First will continue to identify new and practical ways to better engage all sections of society in our long-term economic future.

Resilience: time for a new approach?

 

No one wants power cuts, water restrictions or sewer flooding.    Equally, a one-hundred per cent service guarantee is neither feasible nor affordable. Drawing on the latest New-Pin discussion paper on Long-run resilience in energy and water, Sharon Darcy explains why approaches to resilience that focus on risk management and adaptive planning are becoming increasingly important.

Until recently, most discussions about resilience in energy and water were largely focused on the reliability of infrastructure and the security of big bits of kit.  This mirrored the frequently traditional approach to ensuring resilience through supply side solutions where ‘hard’ engineering interventions were able to bring a degree of certainty to service delivery.

Led by the energy sector, ‘softer’ demand side approaches are now getting more traction, along with an increasing focus on consumer and commercially led solutions that can help to address the supply / demand balance in a sustainable way.  Some people argue that demand-side measures may turn out to be less dependable than those on the supply side. But, faced with uncertainty about the future, demand-side developments may also offer diversity and flexibility for both sectors.

As approaches to resilience have evolved, so too has the way in which the issue is ‘framed’ in discussions.  There is now broad agreement that as well as having a technical dimension, resilience also has social and environmental dimensions, for example, which recognise that energy and water are part of wider services and systems.

Climate and technological change, and the significant unknowns these bring, are driving new ways of thinking about resilience in energy and water.  Most visibly, this can be seen through the impact of extreme risks – such as intense rainfall leading to flooding, or thinking on cyber crime. Responses to each are highly dependent on effective approaches to public communication.

Less obvious, perhaps, is the fact that we are increasingly dependent on electricity for the digital connectivity that drives every aspect of our lives.   When the power goes down, computing and communications systems can be ‘disabled’ – having a knock on effect not only on energy and water resilience but also more broadly.  The floods in Lancaster in December 2015 provide stark evidence of these wider impacts.

The fact that the energy and water sectors are becoming both increasingly complex and more interdependent can accentuate this problem.  Many of the approaches designed to secure future long-run resilience, such as desalination or carbon capture and storage, may in practice bind the sectors more tightly together.  Changing consumer and citizen expectations, such as the desire for constant broadband connectivity, are also leading to pressures for improved contingency planning and more innovative ways to respond, and recover, when services fail.

The development of more local and regional resilience solutions pose new opportunities and risks.  Whilst decentralised approaches can be attractive, they raise questions about what happens to existing networks.  Similarly, new cross-sector approaches can help avoid single-point failures and may potentially lead to combined energy and water efficiency packages.  However, they also add to the complexity of decision-making; thinking about, let alone delivering, a ‘system of systems’ approach to resilience is a major challenge.  Market solutions to resilience are providing flexibility and innovation but can also lead to the increased fragmentation of services, requiring transparent rules for access-pricing and a need to ensure the end to end customer experience is, within reason, secured against future shocks.

Stakeholder engagement, both as consumers and citizens, is important in a world where the demand side plays a bigger role in securing resilience.  More attention is needed on how to capture stakeholder views on cross-sector issues effectively.  Re-examining existing standards which may be strongly engineering-based may also help with addressing future resilience.  In energy, for example, deterministic standards can be inflexible.  A more risk-based and tailored approach to standard setting may be more appropriate given uncertainties.

Resilience needs strong leadership to bring together the wide range of actors needed to deliver it. There is already much going on in the sectors with significant scenario planning being undertaken.  Doing more to share lessons and mainstream good practice should be relatively easy.

The harder task is likely to be to ensure leadership when resilience solutions raise distributional questions or when the most appropriate approach may require coordination between institutions and funding streams. The following resilience principles may be of help here:

  • Risk based – take account of the full range of risks, including systemic risks.
  • Agile – build in optionality and adapt to changing circumstances.
  • Engaged stakeholders – ensure that the public are engaged and that this shapes decisions.
  • Understanding of affordability – take account of fairness, including across generations.
  • Cross-sector view – ensure approach is holistic and joined up technically, commercially and from the citizen and consumer view-point.
  • Partnerships and collaboration – build connections and promote diversity.
  • Transparency – share assumptions, clarify responsibilities & explain decisions.

Managing risks in a proactive way and using an adaptive planning approach is likely to bring greater benefits than putting on a hard hat or pair of wellies mid-crisis and calling for immediate – and visible – action.

 

 

 

‘Public interest’ use of household smart meter energy data

Sustainability First launched a short ‘research challenge’ last year, together with the Centre for Sustainable Energy in Bristol and the academic network, TEDDINET.  We asked two university researchers – Simon Elam from UCL and Jess Britton from Exeter University- to look at the ‘public interest’ agenda for smart meter data.

Most current thinking about smart data is focused on commercial innovation by energy companies and others – but we may miss an opportunity. For the first time, in every home, accurate time-related energy-use data will be recorded at the meter (half-hourly for electricity and daily for gas).  Smart meter data could clearly serve a wider ‘public interest’ agenda in many helpful ways. But, with much effort rightly being devoted to getting the smart-meter roll-out ‘right’, a wider public benefit dimension does not currently get the attention it deserves.  That is why we launched our challenge.

We have now published the excellent papers that Simon and Jess have written.  Here is a taster of their findings.

What might an improved energy usage evidence base deliver for different actors?

  • Better targeted advice – nationally, locally – for consumers & households.
  • For government: improvements to energy models and demand-side inputs, to evidence-based energy policy; to better targeted interventions. Better evaluation of outcomes: for the fuel poor, for energy efficiency, heat, self-generation, including the distributional impacts of policy.
  • For energy companies, networks and regulators: better-targeted investment for smart grid and smart energy systems and community energy projects.
  • For cities: better evidence to support local energy schemes, to target energy efficiency, to plan and develop infrastructure for electric cars, for heat, for housing development.
  • Better-targeted local services for the elderly, the fuel poor, young families, students; and better-informed partnerships – with social landlords, the health agencies.
  • Better insights from academic research and the not-for-profit sector.

Today’s official data for energy consumption remains fairly basic, being derived from customers’ anonymised annual consumption figures. Local-level data, and some limited half-hourly data from trials, is also available. Today’s annual consumption data can also link to other data sets: for example, on the housing stock, demographic or deprivation data.

But for the future, half-hourly energy-use data offers significant new analytical power in terms of the public interest uses touched on above.

So what issues would gaining access to this data raise?  Success of the smart meter roll-out depends – critically – on customer trust.  For this reason, the Government has rightly given a great deal of attention to deciding who can access smart meter data and how.  The Data Access and Privacy Framework  puts the consumer in control of their data.  For example, energy suppliers are entitled to use one-month aggregate data for billing, but, if the supplier wants to access half-hourly data stored on the meter, their customer must give an explicit ‘opt-in’ consent.

Others can also access smart meter data, but likewise with individual customer ‘opt-in’ consent.  Organisations who may wish to use this data for wider ‘public benefit’ analysis may need quite sophisticated systems and be well-resourced, if they are to be able to meet the requirements to be a ‘trusted’ data-user with the Data Communications Company and to manage the process of obtaining individual customer consents. For those without a direct interface with energy-customers already, this might prove quite a big step.

These challenges for making use of smart meter data for ‘public interest’ purposes are not insuperable.  But customer trust in the smart meter roll out is essential and it is right that the privacy hurdle is set high.  Equally, the wider public policy benefits from the use of smart meter data could well be significant.  The opportunity is there. Much could be done with data aggregated to a level that ensures customer privacy.  We hope that our roundtable held in mid-March made a good start in raising the importance of harnessing smart meter data to develop better public policy. This is a conversation we will wish to continue, not least to help inform  the 2018 review of the privacy rule-set.

Trust: on tap and down the pipes and wires?

It’s an old adage that trust is hard won and easily lost.  But what does this mean in the energy and water sectors?  Sustainability First’s lead associate on the New-Pin project, Sharon Darcy, summarises a major new policy paper and the Network’s February workshop on trust and confidence in energy and water.

Trust is a relational concept.   Based on an assessment of ability, motivation and integrity, it is built up over time.  It is not something mechanistic or transactional that can be dictated or reset at the behest of a single actor. In energy & water, trust is built on a complex web of dynamic relationships between consumers / the public, companies, investors, government and regulators.  There are strong inter-dependencies here.  Problems with trust in one area can have knock-on impacts on trust in the ‘system,’ creating a context where confidence can easily be undermined.

Trust can mean different things to different stakeholders. To have trust in energy and water companies, consumers generally want quality and resilient services and value for money; getting these right first time is important.  Given the long-term social and environmental impacts the sectors can have, the wider public may also expect a voice in these services and the systems that they are part of.

People understand that problems with services can sometimes happen. How companies and others respond to events is key.   Being proactive, open and honest in the face of unplanned disruptions, for example, can actually build trust between companies and customers.

If service providers handle these things badly, however, the public may take a greater interest in ‘aggravator’ factors such as lack of choice or poor market behaviour.  Whilst competition can help build confidence by putting a downward pressure on costs, the complex disaggregated value chains in energy retail markets, for example – and different views on profits and costs – can erode trust.

Downward spirals of trust can occur, particularly if regulators are not seen as standing up for customers through prompt enforcement action.  Questions about the legitimacy of regulatory frameworks may follow.  In this context, negative media coverage of issues around services can quickly translate into concerns around wider issues of ‘fair play’ such as corporate tax arrangements, executive remuneration or company ownership; the resulting political risk increasing market instability and reducing investor confidence.  If the costs of borrowing go up as a result, and long-term investors see the sectors as less attractive, it can make the task of delivering value for money services all the more challenging.

Faced with such a prospect, what can be done to ensure that energy and water services are judged trustworthy?  An essential first step is for companies to own their own problems – through engaging with stakeholders so that they can deliver the outcomes that consumers and the public want.

Individual companies – plus the sectors as a whole – showing leadership, through a strong ethical culture and long-run vision, can help create upward spirals of trust.  Companies proactively sharing information and collaborating with regulators and other stakeholders can add to the positive. Clear long-term narratives and consistent signals and behaviours from regulators and government can also help, establishing an environment that is attractive to responsible investors and where innovation can flourish.

There are no silver bullets here.  An holistic and coherent approach is needed by all stakeholders if trust is to be built and maintained.  Getting the right processes in place in the round is crucial if confidence is to be sustained.

Keeping future energy and water bills affordable

Following a workshop of New-Pin sponsors and supporters in October, Sustainability First has published the first of its major New-Pin policy papers, on long-term affordability.  Sharon Darcy, Sustainability First’s lead associate on the project, summarises the paper below.

Robust energy and water services are essential for individual and environmental health and vital for a strong economy.  Although a significant minority of people currently struggle to pay their bills, we all have an interest in ensuring bills are affordable, fair and acceptable – both for today and tomorrow.

In the coming decade, two thirds of the projected investments in the energy sector and nearly all of the projected investments in the water sector will be met through consumer bills.   At the same time, some are predicting that households in low-income groups may see their incomes decline.

Looking ahead, the energy sector faces a step change in costs as it seeks to cut its climate emissions and weather proof its services.  There is significant uncertainty around future wholesale costs, the price of carbon, and the effectiveness of energy efficiency measures that are designed to offset these. If this uncertainty leads to a delay in low carbon investments, risks and costs could increase, potentially making energy even less affordable for future generations.

In water, costs are likely to increase more incrementally and be driven by the need to adapt to both droughts and floods.  However, the ‘unprecedented’ weather of recent weeks is a sobering lesson that the future is not always the same as the past. Key uncertainties are around the scale of future sewerage costs and the quantity and quality of water resources.

When thinking about who should pay for future costs, there could be a logical fairness argument that long-term investments that primarily benefit future users should be met through ‘progressive’ taxation to pool risks and costs within and between generations.  However, in the current fiscal and political environment this may not be credible, except in the case of strategic investments of national importance or where Mayoral Authorities decide to pay for projects through business rates and local infrastructure funds.  This position clearly has distributional impacts.

The existing problems faced by energy and water consumers that struggle to pay are therefore unlikely to diminish in the future, and may actually increase.  A more holistic view of costs (including the costs of natural capital maintenance and repair) is needed if the full impacts of future affordability pressures are to be understood.  Energy and water companies are likely to continue to have a key role to play in managing this issue and will need to proactively develop strategies to identify groups that will struggle before they get into difficulty, working in partnership with third parties to develop and deliver targeted information, advice and support.

Consumers through their every day actions can help to reduce costs by using resources more efficiently.  However, the wider ranging and systemic risks and challenges that the energy and water sectors face will require a more coherent and joined-up approach to policy, regulation and service delivery in the future if long-term efficiency and affordability are to be maximised.

A clear vision and stable, predictable policy and regulatory frameworks on both the supply and demand sides will be needed to keep future costs as low as possible.  These should set out any trigger points for reviews in advance and also cover the future role of building and appliance standards and in-home communications infrastructures. Consideration will need to be given as to how to incentivise key actors such as developers to facilitate efficiency and resilience.

There is clearly an important role for competition in and for the market (eg auctions) to reduce long-term costs.  However, to release the potential of the demand side and facilitate technological and commercial innovation, it may also be helpful to take a fresh look at the respective contributions of competitive compared to collaborative approaches to managing long-term costs.  Re-shaping and / or integrating new markets comes at a cost if institutional inertia is to be overcome and market actors to be persuaded to form new partnerships and work outside their existing ‘vires.’  Recovering such institutional and transition costs on an ad-hoc basis could make it difficult for the energy sector in particular to evolve at the ‘right’ pace of change. A less atomised and more strategic approach to managing such costs may be needed.  The newly created National Infrastructure Commission could potentially provide a useful contribution here.

If future major investments are going to be primarily met by bill payers, it will be important to ensure that costs and profits are transparent.  Armed with comparative information on these points, consumers and public interest advocates will need to be engaged in decisions about prices and investments in a timely fashion so that change can take place in an acceptable and measured way.  Being clear who is making and accountable for decisions as to what should be paid for – along with who is bearing the long-term risks and accruing the long-term benefits – will be vital if the legitimacy of decisions and decision makers is to be maintained.

Good Reasons for Sceptics and Deniers to Support Renewables

A perspective from Sustainability First’s Chair of Trustees

The vast majority of the thousands of scientists around the world who have studied climate change confirm that man is by far the most likely culprit and that the problem has to be addressed as a matter of urgency. The 2015 Paris Climate Summit with around 200 nations represented also accepted this position, and the pressing nature of the threat.   Despite the now high level of agreement, there are still a number of sceptics and deniers who are often given airtime for views that often have little basis in scientific evidence.

However, there are good reasons to support a shift to renewable energy and cutting emissions, which should convince even the most contrary of the contrarians to support a new approach to energy supply. An economy based on renewables would herald wider changes, especially by giving communities more control.

A shift to renewables has a number of collateral benefits:

First, renewable energy not only produces fewer greenhouse gases, but is also far less polluting at local level. Smog in China and the levels of nitrous oxide and particulates in urban environments across Europe have recently been recognised as real threats to health. The simple fact of the matter is that burning of fossil fuels adds to the pollution of all environments to a greater or lesser extent and increasingly poses a real threat to human health.

Second, a switch to renewables also changes the whole nature of power distribution and depends upon much more localised production. This shifts us away from the top down grid system and gives power back (literally) to individuals, social enterprises and communities. This is especially important in developing countries and rural areas where power grids either do not exist or connection is prohibitively expensive. Renewables can actually become part of the local economy. It also engages people in their local environment and begins to reconnect them to natural processes which have been lost in much of our recent development.  A lot of the sceptics and deniers seem to disapprove of state intervention and support calls for a ‘smaller state’ – well here is their chance to commit to the devolution of power.

Third, renewables make us far less dependent upon large scale regional, national and international supply systems and provide us with a greater level of energy security. A large number of small community-based schemes feeding up into a grid are less susceptible than top-down schemes which are entirely dependent upon national and international economic and political change. It is of course also the case that some renewables are part of large-scale schemes and these should be welcomed too, but they will be part of a different mix of provision.

Fourthly, a disaggregated power system will spill over and create a wider community awareness and ownership of a range of environmental issues. This will help generate support for more localised systems of water storage and use, an interest in the production and disposal of waste, and greener transport systems. It may also lead to the development of localised energy storage which is still in its infancy but is rapidly developing. For example, the London Borough of Camden has recently commissioned solar battery-charging schemes, and both Tesla and Mercedes Benz have announced the sale of home battery storage systems.

The local potential of small-scale schemes and citizen involvement has been recognised by some cities at least. Bristol has established the Smart Energy City Collaboration to manage local energy supply and demand and enhance the value of heat and power generated in the city, particularly from variable sources like wind, solar and tidal.

The potential for renewables to reduce local pollution levels, improve energy security, change the whole system of supply and demand and improve local ownership of environmental issues – as well as tackle climate change – is huge. Even the climate change sceptics and deniers should be convinced!

Ted Cantle