The prospect of a decarbonised energy system is now tantalisingly close, pushed forward by an infusion of renewables into the grid, the falling cost of wind and solar PV power, and advances in energy storage and smart digitalisation.
A modernised grid could deliver more from less, at substantially lower cost, but it would also require a rethink of market structures and a system that incentivises suppliers to sell customers volume, leading to waste.
Keen to forge a new path, energy providers are experimenting with a range of new business models, products and services that redefine their relationship with customers and how they pay for their energy.
Energy-as-a-Service (EaaS) would see suppliers take over end-to-end management of a customer’s energy service to optimise efficiency and help them avoid the upfront capital costs associated with low-carbon heating systems. Time-of-use optimisation models leverage value from flexible energy sources by shifting electricity demand to cheaper times of day when fossil fuels are less in use. Other disruptive ideas, such as peer-to-peer energy trading platforms, lifestyle products and bundled services, also promise to transform the nature of transactions and suppliers’ engagement with the market.
A diverse range of options can be expected in a decarbonised future, explains Laura Sandys, business entrepreneur and policy innovator at Challenging Ideas: “Different components will be incorporated into energy packaging. It won’t just be about kilowatt-hours delivered, a charge may also include payment towards solar panels, an electric car, or perhaps home energy efficiency measures. Energy suppliers may offer financial service products, for example, an electric vehicle might be leased with embedded energy equivalent to a certain number of miles a week, so utilisation of energy is part of the overall capital asset.”
The government has committed to fully decarbonise the energy system by 2050 and is currently working with Ofgem and industry stakeholders to define the policy, legal and regulatory changes needed to future-proof the energy retail market.
As the principal interface between the energy system and consumers, suppliers have a key role to play in ensuring that customers get access to the benefits of a smart, low-carbon energy system, including increased flexibility and lower costs.
Tom Pakenham, director of electric vehicles at Ovo Energy, tells Utility Week: “Energy suppliers are not just thinking about how they charge differently, but how they build a different relationship with customers and find new ways to interact with them. It begins with a kind of a recognition that the relationship is going to be deeper and more complicated than just buying and selling a commodity with a mark-up.”
An important driver is the need to simplify customers’ engagement with energy in the face of a more complex distributed grid, he adds: “Mass uptake of flexibility and smart energy consumption will require us to make it really easy for our customers. The majority will want to delegate intelligence to some form of platform that can control it on their behalf, get them the lowest price energy for their needs, or even sell back energy to the grid.”
The relatively high capital cost of low-carbon technologies, such as air source heat pumps or vehicle charging systems, coupled with consumer wariness of their benefits, could hold back decarbonisation.
One potential solution to this is EaaS, which mimics popular subscription-based services for things like video streaming or mobile contracts, by charging customers a fixed fee for a guaranteed level of electricity or heating. The supplier manages the entire service, including investment associated with technology upgrades.
Steve Jennings, head of UK Power and Utilities Sector Practice at Pricewaterhouse Coopers, tells Utility Week: “When you think about the concept, it makes sense; through all of the devices in the home you transfer the investment decision to energy suppliers who should be better positioned to make decisions to deliver a return on investment that meets the specific service requirements.
“If a boiler is inefficient, they can invest in a new low-carbon boiler that provides the same level of service at a lower cost. Or in the case of electricity, if a homeowner has solar panels on their roof and doesn’t need all the energy, the supplier can invest in a battery and export the surplus back to the grid.”
In February, Bristol Energy completed the first ever trial of heat-as-a-service by a UK energy company as part of a government-backed project that could pave the way for extensive low-carbon retrofits.
The year-long testbed saw a subset of homeowners in the Energy Systems Catapult’s Living Lab (a collection of 100 homes nationwide fitted with smart heating systems including room-by-room temperature controls and thermal sensors) sign up for either fixed price or pay-as-you-go style “heat plans” for heat and hot water.
Hours of warmth, instead of kilowatt-hours, were purchased based on a fixed schedule of room-by-room heating tailored to customers’ needs, with variations on levels of service and payment terms.
Samantha Nicol, head of innovation at Bristol Energy, tells Utility Week: “The purpose of the trial was to assess customer behaviour and understand what it would take to switch them to low-carbon heating in a more effective way. The onus is on us as an energy supplier to provide the right advice and recommendations for installation and when it is time for homes to move from a gas boiler to a heat pump if the suitability is right.”
A survey of the test cohort revealed some positive reactions. According to Nicol, 77 per cent of customers said they prefer the idea of a heat plan to buying a heat pump up front, and 85 per cent said they are more open to alternative methods of heating after being on the heat plan for a year.
Subsidies available through the government’s Renewable Heat Incentive to fund low-carbon heating technologies could help the business model stack up, says Ed Hunt, service design lead consultant at Energy Systems Catapult: “Subsidies could enable a new ‘box’ to cost roughly the same as a regular gas boiler installation over the duration of its lifetime and could be used to support some of these contracts going forward.”
But the energy-as-a-service approach poses challenges. The huge variation in thermal performance between different properties would require extensive survey work to capture the specific heating requirement for each home. If similar properties are charged different rates, for example if one has double glazing and another doesn’t, it could lead to customer complaints and accusations of a lack of pricing transparency compared with standard charges based on energy consumption.
“You also get into the argument of fair use policies needed to address those customers who turn the heating up and leave all windows open,” says Phil Steele, future technology evangelist at Octopus Energy. “The Energy Systems Catapult found that 1 in 50 customers breach fair use policies. If that equates to 2 per cent of the energy market, that is quite a large portion, if not all of the margin an energy supplier makes.”
The ongoing smart meter rollout, and greater penetration of decentralised energy and storage on the grid, are building momentum behind time-of-use, or differential, pricing structures, which can cut consumer energy bills and reduce strain on the energy network.
The principle is to encourage customers to switch to consuming electricity at times of lower demand when unit costs are cheaper. Prices can be fixed, for example 10p per kWh in the morning and 5p per kWh in the middle of the night, or dynamic and changing based on availability of energy in the system. Customers on these tariffs can operate appliances manually to use energy at the desired times, or devices can be automatically triggered.
Octopus Energy has been particularly innovative in this space, its Agile time-of-use tariff gives customers access to half-hourly energy prices tied to wholesale prices, updated daily. Prices closely mirror levels of carbon intensity on the grid, so at times of peak demand, when gas takes up a lot of the load, the unit cost is higher, and when there is little demand, such as overnight, the UK’s extensive base of wind turbines takes up the strain, resulting in low prices.
The tariff also takes advantage of “plunge pricing”, a phenomenon whereby networks have too much wind energy, so they must price it far cheaper, even negatively, to offload it. Agile passes these negative prices on to
customers; during one windy period in December, homeowners were paid up to 5p for every unit of electricity used.
In the future, automated time-of-use tariffs could become the norm. The energy intelligence platform Kaluza, owned by Ovo, provides a glimpse of where the market might head. The system connects to a range of smart devices and uses machine learning and AI to determine the amount of flexibility available to help balance the grid. The system can remotely optimise devices in the home to use energy during off-peak hours, when cost and carbon intensity are lower.
Automation could help solve the problem of intermittence associated with renewable generation, says Octopus’s Steele: “Greater penetration of renewables like solar farms and wind generation increases intermittence on the grid, but these tariffs could intelligently send signals to homes to tell them, for example, now’s the time to charge the car.”
But the differential pricing proposition faces barriers. Apart from smart meter uptake, it relies on suppliers gaining access to customers’ half-hourly data, which at present they must consent to. The model also places an onus on consumers to make substantial lifestyle changes.
Network charging reforms under Ofgem’s Targeted Charging Review (TCR) could make flexible energy control and time-of-use tariffs less attractive. A market distortion whereby some users avoided network charges altogether by shifting their demand, failing to contribute to network costs, led the TCR to introduce a fixed charge for all system users.
Ovo’s Packenham comments: “Savings that could be generated currently by smart charging an electric car, for example, will be significantly reduced by the TCR, at least until April 2023. So while the economics were interesting before and something the sector could start to coalesce around and build customer support for, they have become quite a lot worse. It is going to be quite challenging for energy suppliers to make the business model fully stack up.”
Flexibility democratises the energy system by allowing consumers to become proactive “prosumers” with distributed energy resources who actively manage their consumption, production and storage of energy
Peer-to-peer (P2P) energy trading platforms have emerged as a potential mechanism to manage these complex local networks of users and co-ordinate transactions. Smartphone apps or online platforms would allow users to monitor energy and trade it instantly, helping to facilitate a more competitive energy market as well as supporting grid balancing.
But P2P poses a threat to the traditional supplier model and major energy firms, including Centrica and EDF Energy, are currently running trials to understand the implications. The £40 million government-backed Project LEO (Local Energy Oxfordshire), launched last April, will see the tech firms Piclo, Origami and Nuvve work with EDF to develop new platforms to trade energy and flexibility locally in Oxfordshire.
Centrica is part of a trial at a social housing community in Hackney, London, that aims to explore how P2P trading using blockchain technology could reduce customer bills. The project will consider how to create clear and fair bills in a network where energy is coming from multiple sources, in this case gas from British Gas, and solar panels.
The net-zero challenge has triggered much excitement and experiment across the energy sector. New retail products and services are part of the solution, but what form they ultimately take will hinge on fundamental questions around policy, regulation and the future role of the energy supplier.
“We are still trying to squeeze renewables into a fossil fuel paradigm,” says Sandys at Challenging Ideas. “My proposition is the system needs to be re-costed because renewables are fundamentally a capital asset (energy generation is very cheap), not a commodity in the old-fashioned fossil fuel sense. Things need to change to unlock investment in renewables.”
“The sector needs to work on its pricing mechanisms to make sure that the lowest-cost method of solving this problem is able to provide the solution,” adds Pakenham at Ovo. “We need to see a carbon price as a proper reflection of the cost of carbon in our energy system, which a lot of people are pushing for. These factors will change the price of different energy sources to customers.”
Ofgem recently concluded there is a strong case for fundamental reforms to the “supplier hub” model. Decisions that result from its consultation on whether the retail market is flexible and agile enough to keep up with the low-carbon transition should also make for interesting reading.