United Kingdom

The Challenge

As part of its duty to protect consumers, the Office of Gas and Electricity Markets (Ofgem) is exploring innovations such as time-of-use (ToU) tariffs to help consumers share in the benefits of demand management. However, the relative impact on consumers from the introduction ToU tariffs enabled by the smart rollout is currently unknown. As Ofgem also strives to protect vulnerable consumers IPA was commissioned to provide a high level distributional impact assessment to inform Ofgem’s strategy development.

Our Solution

IPA initially identified an appropriate dataset. It was important that the consumption data contained sufficient sociodemographic information to enable the distributional impact to be explored. The dataset also needed to be granular enough to proxy half-hourly settlement as targeted by ToU tariffs. We used this data to:

  • Estimate load profiles for each sociodemographic group, ensuring that the underlying consumption drivers were identified for vulnerable consumers;
  • Use these load profiles to calculate how households’ bills may change for different consumer groups, based on stylised time of use tariffs and assuming no behavioural change; and
  • Summarise the results for the range of consumer outcomes.

The introduction of ToU tariffs will allow each household’s bill to more accurately reflect their consumption and the costs they impose on the system. These tariffs can also encourage households to shift their consumption from peak periods, reducing the need for new generation and network capacity, thereby reducing costs for the sector as a whole. So IPA’s next step was to:

  • Outline the reasons why certain customers would be worse off, based on their consumption of electricity; and
  • Provide an indication of whether behavioural change would be likely or not.

Finally, IPA summarised its findings in a short report and drafted a terms of reference for a larger scale study into the topic. We also investigated international experience to inform the study’s scope.