Dynamic tariffs saved £150 on electricity for typical customers in last 12 months

‘Typical’ customers would have saved £150 in the last 12 months on a dynamic time-of-use electricity tariff – but will need to be able to shift their consumption to achieve the same in 2025.

Summary:

• BFY analysis shows that customers will have saved ~£150 on a dynamic electricity tariff in the 12m to October 2024 - before even adjusting their time of use from the ‘typical’ consumption pattern
• Most of this saving is due to the price cap wholesale index falling more slowly than day-ahead prices (which dynamic tariffs are based on)
• With the wholesale market now flatter – customers are no longer guaranteed to see cheaper bills, unless they can adjust their time of use

Customers with typical consumption profiles will have saved £150 on a dynamic half-hourly tariff in the 12 months to October 2024

A customer with a typical profile class 1 consumption shape would have saved 16% on their annual bill (£150 for typical consumption of 2700 kWh) with a dynamic tariff, compared to the price cap. Customers with Air Source Heat Pumps (without any smart management), could have seen even greater savings - around £320 (19% of their annual bill).

We are looking at an abnormal period following the energy crisis, though. This saving largely comes from day-ahead electricity prices - which on average were ~35% cheaper than the price cap wholesale index in the 12 months to October 2024. This is due to the lag in the price cap index, which has been slower to fall following the energy crisis (the reverse of when market prices were increasing in 2021). In this period, most customers were almost guaranteed to find savings vs the price cap.

But the gap has tightened – with day-ahead prices now trading more in line with longer-term products (and the price cap index). In the last 3 months, the average day-ahead price has only offered a ~10% discount against the price cap, similar to pre-energy crisis.

Customers are no longer guaranteed to see cheaper bills from dynamic TOU tariffs – but the opportunities are there

Energy customers with typical consumption profiles could expect to see only ~£30 (4%) saving versus the price cap over the next 12 months if the wholesale market remains flat, lessening the discount available on day-ahead electricity. We've made this assumption to provide an illustrative view but actual day-ahead prices depend highly on supply and demand.

This also assumes a typical profile class 1 consumption curve - the reality is that dynamic pricing gives daily opportunities to make savings and achieve cheaper electricity. But customers will now need to be engaged and flexible in how they use their electricity to unlock savings. In other words, dynamic tariffs are once again all about being dynamic.

Customers need to be responsive to benefit from dynamic pricing

Dynamic tariffs incentivise reducing peak-time energy use. Up to 40% of typical domestic consumption occurs during peak-hours - customers will need to reduce this to make any substantial savings vs the price cap.

However, the opportunity for savings also comes with risk. Without the substantial day-ahead discount (like we saw in Q1-24), dynamic customers are more exposed to wholesale volatility.

Just this month, interconnector outages and low wind output saw dynamic unit rates as high as 70 p/kWh, 3x the price cap unit rate (during the evening peak on 14^th Oct 2024). And in September 2024, we saw the consumption-weighted day-ahead electricity more expensive than the price cap on most days (assuming a typical consumption profile).

Customer engagement is needed more than ever

Existing dynamic customers may have become accustomed to seeing cheaper bills without flexing their consumption. However, suppliers need to be engaging with their customers – ensuring they can respond to price signals, and reminding them of the risks that come with their tariff.

Customers with low-carbon technology, such as Heat Pumps and EVs, stand to benefit from dynamic pricing the most - but they will need support to respond to pricing signals. These customers, with a large shiftable capacity, may find frequently responding to prices exhausting or unappealing.

Automated, smart technology is the long-term solution, which can optimise consumption without requiring manual intervention. However, before then customers need to be engaged and fully able to understand and respond to dynamic pricing.

As the introduction of Market-wide Half Hourly Settlement (MHHS) further incentivises suppliers to offer time-of-use tariffs at scale (dynamic or not), now is the time to better understand customer segmentation and customer engagement with time of use.

Contact Matt Turner for more on opportunities to better drive customer engagement, and maximise the benefits of dynamic pricing.