Power to the people? UK electricity suppliers disrupt retail market

UK consumers have access to a competitive energy retail market and are able to switch between suppliers with little more than a few clicks online.

But electricity bills can still feel divorced from actual energy costs, with households often failing to feel the benefit when newspaper headlines shout about negative electricity prices.

The UK energy retail market has traditionally been dominated by the “Big 6” suppliers who have charged consumers a fixed rate for their electricity, regardless of fluctuations in the wholesale price.

Disruptive entrants to the market, who are linking consumers to wholesale prices, are now challenging this system, encouraging use of renewable electricity and helping to balance renewable supply with demand.

Renewables and price volatility

The share of renewables in the UK energy mix is growing rapidly as we face up to the challenges presented by climate change. In Q3 2019, UK renewables generated 18.48 TWh of electricity. Five years earlier, in Q3 2014, renewables produced just 6.69 TWh.

The increasing use of renewables, which generate power intermittently, is causing more price volatility in the UK wholesale electricity market and this trend is set to intensify as further capacity is added. In January, construction started on the Dogger Bank wind farms off the northeast coast of England, a project that will add a further 3.6 GW of capacity to the grid.

However, consumers have been buffered from volatility-induced low prices by paying “fixed rate” tariffs – though these also have the upside of carrying the same cost even during periods of high wholesale prices.

Since most people have a similar daily routine, they end up using electricity at a similar time, resulting in a predictable daily power demand profile that often does not match renewable generation patterns. The UK therefore relies on more flexible energy generation during peak demand periods, including the use of fossil fuels, as well as imports from neighbouring countries.

Conversely, in periods of low demand, such as in the early hours of the morning when people are asleep, wind farms can keep supplying electricity to the grid, resulting in low or even negative prices, where power suppliers have to pay their wholesale customers to buy their electricity. Negative prices are becoming increasingly common in countries with a large proportion of renewables in the power mix.

So far in 2020, UK wholesale power prices have reached negative territory on 10 separate days, based on the Market Index Price intraday reference, as a number of storms brought high winds. Furthermore, Europe has been experiencing some of the hottest summers on record in recent years. As the incidence of extreme weather events increases, and more investment goes into renewables, renewable generation is set to increase, and with it, the possibility of negative prices in Europe.

Go deeper: Demand for green power and Guarantees of Origin

In the 2018/19 financial year, wind farms in the UK were paid £173 million to stop production so as not to overload the grid during periods of low demand. Instead of turning off this free supply of electricity, some disruptive power suppliers are looking at the issue differently. By linking electricity end-users with wholesale prices, they are encouraging their customers to use electricity during periods of high renewable generation and/or low demand, helping to balance supply and demand. Customers can therefore pay less for their energy by making more efficient consumption decisions.

The disruptors

Energy retailers offering “green tariffs” have become popular with British consumers, breaking up the oligopoly the “Big 6” have held over the energy retail market. Since 2011, the ‘Big 6’ have lost their collective 100% market share, falling to 70% as of Q3 2019.

Furthermore, on January 15, renewable energy provider OVO completed the acquisition of SSE, making it the second largest UK energy supplier.

As green energy providers become more popular with climate conscious consumers, and the UK continues on its path towards the goal of net zero emissions by 2050, further price volatility in wholesale prices is expected with increased renewable investment.

To help balance renewable supply with demand, some newer suppliers are encouraging their customers to consume electricity during periods of low prices, which often means times of high renewable output.

Octopus Energy entered the market in 2016 and now provides 100% renewable energy to over 1.2 million customers across the UK.

In 2018, Octopus launched the “Agile” tariff, where the price a customer pays is a function of wholesale power prices. Prices are capped to ensure that customers will not pay more than 35p/KWh, and Octopus charge a 12p/KWh penalty for using electricity during peak hours, dissuading consumption during these periods and reducing fossil fuel demand while incentivising renewable consumption.

“The basis is that the additional consumption is being satisfied by wind-based generation that would otherwise be turned off. So the marginal electrons being brought in are all green and zero carbon which would otherwise not exist,” Octopus Energy CEO, Greg Jackson, said on Twitter on February 16.

On the same day, during the weekend when Storm Dennis brought high winds, Octopus customers on the ‘Agile’ tariff would have been paid to consume electricity between 2am GMT and 6am GMT.

There are other such tariffs available. Pure Planet, the first app-based power supplier, also provides renewable electricity and carbon-offset gas to its customers through a single tariff, at cost – with no margin on top of the wholesale price. Instead customers pay a membership fee for the service Pure Planet provides.

Both retailers make use of smart meters and provide their customers with accessible real-time price information. And both have harnessed the power of social media and online communities, not only using them to deal with more run of the mill customer enquiries, but to encourage consumers to be more active in the management of their electricity use.

Consumer power

By linking consumers to wholesale electricity prices, these power suppliers want to enable consumers to make cost effective and energy efficient consumption decisions, helping to balance demand with increasingly volatile generation as we use more renewables.

The disruptors among energy utilities are in this way encouraging consumers to take charge of their own electricity supply, which could help to mitigate the effects of more intermittent generation connecting to the grid. But there is a limit to changes consumers can make to their consumption patterns. It seems unlikely many would be willing to change their sleep patterns to shower or cook in the middle of the night when prices are lower, for example.

But the new wholesale-price linked tariffs may come into their own as EV ownership rises. EV batteries can store electricity produced during times of high generation, and as they become more widespread, overall battery capacity will increase. This will provide potential storage for excess electricity in times of high renewable generation or low demand, which could help to balance the grid.

The popularity of these tariffs and the success of the companies providing them may therefore hinge on the uptake of EVs, which is forecast to grow as the UK phases out petrol and diesel cars.