Energy tariff diversity can empower consumers, lower bills, and cut carbon emissions - Tom Luff

Comment by Tom Luff, Senior Adviser (Electricity Markets & Policy) at Energy Systems Catapult.

Whenever I talk to friends and family about energy bills, I get the same response: “I wish they would go away”. They shove the bill into a drawer and ignore it.

Despite prices falling since their peak in 2023, our bills remain historically high: around double October 2020 levels. While it’s driving action among some – particularly those with a good combination of time, money and space: sales of solar panels have skyrocketed – most others feel powerless.

Typical household annual energy bills remain much higher than historical levels.

Typical household annual energy bills remain much higher than historical levels.

One consequence of soaring prices and regulatory response – the Energy Price Cap and Energy Price Guarantee – was that retailers stopped taking on new customers. Even now, the market is sparse, with fixed deals tending to only be for existing customers of the companies offering them.

Simply returning to pre-crisis days of ‘switching’ isn’t the answer.

The energy retail market – which was designed in the 1980s for a world in which energy needs were simpler – pushes retailers towards uniformity. This made sense when all you really cared about was p/kWh.

The shift to Net Zero has turned this approach on its head. The rise of variable low carbon generation, combined with an increasingly stressed grid, means the value of energy depends much more on where and when we use it. The ease with which we can use it differently – to save money and carbon – varies according to our circumstances. Energy tariffs should reflect this diversity of needs.

What could this look like for consumers?

Take insulation by way of an example. It’s a well understood way to reduce your bill and to stop wasting energy through the floors, ceilings, windows, and walls of your home. What if you could press an “Insulate me” button on your energy app? You’d see the savings you could make, and even choose an insulation package (including installation and repayment options) to suit you. Cheap measures would see immediate savings. Payment for more expensive measures would spread over time to avoid upfront costs. Disruptive measures could be planned for when other building work is planned.

Or how about a “Let me flex” module? This could prompt you to shift your power consumption to align with cheaper times of the grid (i.e., when the wind’s blowing strongest and / or when others aren’t consuming so much) or do it for you if you have an electric car or other kind of battery.

And then there’s the “Data means prizes”, where you earn savings by letting network companies have access to your (anonymised) patterns of using electricity, allowing them to plan the network more accurately and reduce costs. Supermarket loyalty cards, which do something similar, have been around for years.

Many people still won’t want to have anything to do with this. But with good customer knowledge and by developing new tariffs, better targeted off-the-shelf propositions can arise. (“I don’t care, just get my bill down”?).

What’s holding us back?

New retail offerings – like the simplified examples above – are being explored by energy companies but their path to commercialisation is blocked by outdated policy and regulations. “Flexibility” (or helping consumers shift their energy use to cheaper times of the day) is undermined by wholesale market rules. Average consumers without an electric vehicle (or similar battery) can barely save more than 10% of their bills in this way – far less than the potential benefits they could offer to the grid. Complex consenting rules limit opportunities to share data. And consumer protection measures fail to provide confidence to consumers that they will be protected if they take up new types of tariffs.

Government committed to publishing a Call for Evidence to examine how the current retail framework needs to evolve to support new ways of offering energy support, and a consultation on options later in 2023.

But innovation to help consumers save carbon and costs will be squeezed out if policy and regulation reverts to generic principles of competition that push the industry towards undifferentiated products.

Priorities to explore

Key priorities to explore should include:

  1. Getting incentives right. Policies should align the interests of retailers with wider objectives to reduce costs and carbon across the system (e.g., with requirements to reduce the carbon footprint of energy sourced). Wholesale markets should allow consumers to capture the true value of the energy they use at any given time and place. And the payment of levies (to pay for legacy renewables projects) should incentivise, and not hinder, low carbon objectives (e.g., electrification).
  2. New players and partnerships. With some fabulous exceptions, stagnation abounds in the energy retail sector. But more dynamic disrupters are successful in closely-related industries and have much to offer – e.g., using their expertise to offer bundled products to households. Policy and regulation should proactively address the barriers that are stopping companies from innovating in the energy sector.
  3. Consumer protection for the future. We can’t wait until we’ve worked out all the ways in which an innovation might impact consumers before we let it enter the market – we should trial new business models, and new policies, in the real world; learn rapidly and adapt as we go. Consumer protection must be forward looking to reassure consumers that the appropriate safety nets are in place.
  4. Opening up data. People are cautious about sharing their energy data and often don’t understand the value it holds. With the right protections and incentives – such as anonymity and consumer-friendly rules for data consent and sharing – they can be rewarded for doing so, allowing retailers or other energy professionals to improve the efficiency of the grid. We must make data consent and sharing simple and easy and ensure consumers receive the benefits of sharing their data.
  5. Reimagining competition. Competition that drives innovation is vital for improving consumer outcomes. But if we focus exclusively on the frequency of switching, we lose sight of the outcomes that people ultimately want (e.g. comfort) and undermine the deeper relationships needed to unlock investment and change behaviours. A different target of competition could be satisfaction. And consumers should be able to opt-in to longer-term contracts with retailers.

A new approach to policy innovation

Ultimately, massive policy innovation is needed. We can’t rely on business-as-usual approaches but equally there’s not one “big bang” that can solve it all. We must be iterative and interactive – with commercial innovators pushing the boundaries and policy makers and regulators receptive to improvements.

Change requires disruption but policymakers / regulators don’t like being disruptors unless they are confident of the result. New tools and approaches to support policy innovation and testing can help. For example, we’ve pioneered the Living Lab, which we built to allow energy innovators to trial products and services and accelerate commercialisation. This is one of several tools that could be used by policymakers and regulators for an ongoing cycle of adaptively developing and testing new ideas.

We can empower consumers to go green and save money on their bills by unleashing innovation among energy companies. Targeted offerings can change the game for consumers, but only if we step out of our comfort zone and reform markets so that incentives are aligned with achieving a clean and efficient grid.

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