This work involves reforming electricity ‘settlement’ - the process for charging suppliers for the difference between how much energy they purchase, and how much their customers actually use. We’re reforming these arrangements across the country while industry is installing smart meters, and more and more people invest in smart home technology.
But why is it important, and what will our work achieve? Ofgem’s Head of Settlement Reform Anna Stacey takes a look at some of our behind-the-scenes activity.
What is settlement?
Currently, suppliers estimate customers’ electricity use based on the average customer’s consumption patterns. There may be discrepancies between this and how much wholesale electricity a supplier has bought. Settlement reconciles these.
With smart meters that can record electricity consumption information every half hour of the day and transmit it, industry can use this information for settlement instead. This means that suppliers will have a much more accurate picture of consumption and demand, and can match their purchases accordingly.
Why is half-hourly settlement so important?
Half-hourly settlement is a major part of the smart, flexible energy system. It can help make the future low-carbon system that we are working towards both affordable and secure. It will help integrate smart technology into the electricity system to help us use the network and the electricity it generates more effectively. It also means that suppliers can bill customers accurately, and base these more closely on the cost of generating and supplying the electricity they use.
Technology such as energy storage allows households and businesses to shift their energy use, and change their demand for electricity in response to price or other factors. This is part of demand-side response:
For example, a battery can recharge when electricity is cheap and plentiful, and then give out the energy when electricity is more expensive. Being able to flex supply and demand will become increasingly important to avoid wasting low carbon generation and to keep the system stable.
For households and businesses, half-hourly data means knowing how much electricity they are using. They can choose to use more or less in response to this information if they wish. This may suit them if they want to avoid times of the day when electricity is expensive to generate, when generation is relying on fossil fuels, when many other households or businesses want to use electricity and they do not, or when networks are strained.
For the electricity system as a whole, half-hourly settlement will help suppliers, network operators and generators understand when and where energy is being used. They can then target when and where to invest in the energy network, and avoid building expensive extra power stations and putting up more poles and wires than are needed.
What changes are taking place now?
From 1 April 2017, all medium and large businesses must be settled on their half-hourly electricity use. This is known in the industry as the code modification P272. Businesses will have detailed usage information and can use this to shop around for a supplier who offers them value for money based on their specific needs.
Suppliers have now changed the meters in businesses and can start to offer time-of-use ‘smart’ tariffs that meet businesses’ needs, rewarding them for moving their electricity consumption away from peak periods.
From July 2017, suppliers who want to are able to settle their small business and domestic consumers using their half-hourly data too, following changes to make this easier. This, alongside smart meter rollout, means that households may soon be able to choose a smart tariff contract. The smart meters allow them to see when they are using electricity, and the smart tariffs will allow them to control their bills.
What are smart tariffs?
Smart tariffs are price signals to consumers. Lower prices reflect the lower cost of generating and transmitting electricity at certain times of the day and year. These prices reflect both the cost of generating and transporting electricity. It is cheap when there is lots of wind and solar energy available, and expensive when diesel-powered generators are used. These prices also include the longer-term costs of building and maintaining electricity networks and power plants. Based on their lifestyle and circumstances, consumers who choose smart tariffs will save money when they consume less during peak periods.
What happens next?
We have launched an industry code review, which will allow us to work with industry and consumer groups over the next couple of years to weigh up whether to require all consumers with smart meters in Great Britain be settled using their half-hourly data.
We will carefully analyse the technicalities of changing the current system and complete a thorough cost-benefit analysis to inform the case for bringing in half-hourly settlement for everyone. We will monitor the impacts of P272 for businesses, and for those suppliers and consumers who choose half-hourly settlement now. In summary we are investigating what we need to do to make sure consumers and the system benefit from making settlement smart.