How will consumers take to Market-wide Half Hourly Settlement?

Ofgem published its decision to implement the move to Market-wide Half Hourly Settlement (MHHS) on 20 April. This confirms plans to move to new settlement arrangements over a four and a half year time period, with the Elexon-led Design Working Group’s Target Operating Model to be used as the blueprint. Meters that are capable of being half-hourly (HH) read (including smart meters) should be settled on a HH basis.

The move is expected to encourage suppliers to bring forward new products which incentivise customers to move consumption away from peak demand periods, a practice known as load shifting. There are a variety of ways this could be supported, including time-of-use tariffs where customers take advantage of lower prices for using electricity during off peak times, the installation of battery storage for demand-side response, and incentives to use electric vehicle-to-grid functionality. While there have been offerings to date with a number of time-of-use tariffs in the market, until MHHS is implemented the incentive is not there yet to encourage all suppliers to offer innovative products with mass market appeal.

Under its high load shifting scenario, Ofgem expects that MHHS could save customers up to £4.5bn by 2045. Even under scenarios where the load shifting achieved is lower there are still expected to be significant benefits. Direct benefits include the need for less generation capacity and network reinforcement to meet peak demand, more accurate forecasting and matching of supply and demand, and reductions in carbon emissions as lower demand can be satisfied with less polluting generation. Additionally, customers may be incentivised to match their HH demand with periods of high generation from renewables, supporting their integration into the energy system.

Implementing MHHS will be a challenge for industry, but it will play a vital role in providing the foundation for a more flexible electricity system. It remains to be seen how consumers will respond to the changes, with a significant proportion of the benefits being completely reliant on suppliers bringing forward products that are attractive to customers. While time-of-use tariffs will offer the opportunity for customers to make savings, the ability for prices to change means that customers may have a harder time budgeting for energy, with the risk that they themselves could be exposed to unexpected cost increases. The possibility of “surge pricing” has already been picked up by the media and allaying such concerns will likely be a challenge. As seen with some of the time-of-use products that have already been brought to market, a cap on HH unit rates is one way that customers could be reassured. Ofgem will also be monitoring whether certain sectors of the population are being disadvantaged by their inability or unwillingness to engage with any new prospects coming forward and the associated cost savings.

It is important to note that just because a domestic customer is being settled HH, unless they have chosen to be on a time-of-use product they will still be billed on the same basis, with costs still being calculated using unit rates applied to the consumption since their last bill. Customers may not perceive any issues with continuing under the traditional approach, preferring to be billed as they always have done without the hassle of having to engage with the unknowns of price signals. On the other hand, peak and off-peak pricing is not a complete unknown, with Economy 7 tariffs already providing different rates for different times of the day to around 19% of GB customers, albeit that prices over a day change much more infrequently than HH. Peak pricing has also been implemented successfully in other areas such as train ticketing, with customers making active choices to make savings by travelling at off-peak times where they are able to. Automation may also play a key role in the uptake of load shifting. A customer could, for example, set up their fridge freezer to automatically turn down during peak price periods, something that could go unnoticed but saves money.

Despite some uncertainties, in the absence of the move there would not be the platform to even provide the possibility for the potential innovation and net zero facilitation that could be seen, and the benefits case makes implementing MHHS a no-brainer.

The full version of this article appeared in Energy Spectrum 761. For a complimentary copy please contact r.buckley@cornwall-insight.com.

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