One of the longest standing challenges in energy pricing has been the mismatch between wholesale and retail sales of electricity. Wholesale prices are granular, with day-ahead markets and half-hourly settlement but the end consumer sees none of that. They can’t take advantage of cheap renewable energy or reduce consumption at peak periods. Sure, there are peak and off-peak periods, but overall the application of “time-of-use” has thus far been vary basic in the residential market.

Dynamic pricing (or dynamic tariffs) aims to change that. The rollout of smart meters in countries around the world allows energy retailers to precisely measure energy consumption and thus offer prices that match current market rates. The hope for dynamic pricing is that it provides a win-win for both customers and the wider energy industry, enabling customers to achieve lower prices, retailers to achieve greater profits, and system operators to better balance supply & demand and improve grid management. At least, that’s the idea. The reality is not quite there.

In this blog, we’ll look at the current state of dynamic tariffs, the challenges to their implementation, and the steps needed to ensure that retailers and customers can obtain the promised benefits. Let’s take a look.

The spread of dynamic tariffs

Dynamic pricing has become a big deal for retailers in one part of the world, with EU Directive 2019/944 mandating that retailers across the bloc offer dynamic tariffs to all customers. Our German language blog looked specifically at the issue for Germany, as the country set a deadline of the 1st of January 2025 for implementation across all retailers (for those who can read German, here’s the link). 

The German story highlights what has hitherto been the biggest barrier to dynamic pricing: smart meters. Traditional meters needed to be manually read, preventing the real-time consumption profiles that are required. Now that many energy markets have rolled out smart meters to most of the public, this has become a much smaller issue. Germany is a major exception alongside Australia, with terrible penetration for both, but the likes of the US, the Nordic countries, France, and Spain are all near complete. Even the UK has converted a majority of existing meters.

In fact, several of these nations completed their rollouts years ago. Nonetheless, we haven’t seen much progress in the spread of dynamic tariffs to customers outside of the Nordics. Here’s a breakdown of the availability by market:

Dynamic Prices in the UK:

The UK is currently undergoing one of the largest changes in the structure of its energy system due to Market-wide Half-Hourly Settlement (MHHS). The change, which is still undergoing systems integration testing,  is intrinsically linked to the issue of dynamic prices. MHHS will bring every meter onto half-hourly settlement, but retailers are able to offer dynamic pricing as long as a smart meter is available.

However, Octopus Energy are the only large retailer to advertise a true dynamic ToU tariff, under the Octopus Agile brand. Despite boasting large potential savings for the average consumer, takeup remains limited and other retailers are not rushing to release their own products.

Dynamic Prices in the United States:

It doesn’t make sense to talk of the US as a single entity when it comes to energy, as states have a lot of freedom to set their own regulations. A lot of the US is still highly regulated with publicly controlled utilities. A better distinction would be regulated US, deregulated US, and ERCOT in Texas, which is separated from the federal system.

ERCOT:

Texas should be an ideal market for dynamic prices to flourish. The state has a highly liberal approach to regulation, the adoption of smart meters is widespread, the state is a leader in renewable and battery capacity, and even the weather provides ample opportunity for customers to adjust their consumption. 

Unfortunately, dynamic pricing was a casualty of the winter storms that have wreaked havoc on Texas’s grid in the past few years. Prior to the storms, companies were able to offer customers energy prices that reflected wholesale market prices, with the most well-known company being Griddy. Griddy went bankrupt in 2021 as it was unable to manage the surge in prices that resulted from the weather conditions.

De-regulated US:

There is a better spread of dynamic pricing in the other de-regulated parts of the US. California is the leader here, with more accurate time of use tariffs available since the early 2000s. However, other parts of the US have not followed suit. In fact, regulated US states are doing better than the free market currently, with Georgia, Colorado, and Arizona all demonstrating progress. Overall, around 15% of the US market is currently on dynamic pricing tariffs.

Dynamic Prices in Australia

Australia has a slow smart meter rollout that is not due to be completed until 2030. As such, dynamic tariffs are still not widely available, but the Australian Energy Market Commission’s (AEMC) National Electricity Rules require that participants gradually ensure that the bills for electricity reflect the costs. However, this mandatory roll-out of a new pricing system has been criticised by consumer rights organisations. Energy Australia boss Mark Collette, whose company supplies about 1.6 million households, remarked upon the over-complication of electricity prices amid the rollout of dynamic pricing and smart meters.

Dynamic Prices in the Nordics

The biggest success story when it comes to dynamic pricing is in Scandinavia, with Norway having more than 50% of the residential market on dynamic tariffs and Finland & Sweden are not far behind. Partly, this represents unique geographic factors that are not replicable everywhere; Norway has better penetration for heat pumps and EVs, while its generation mix is less exposed to volatility and thus seen as less risky.

Nonetheless, there are strategies that Scandinavian retailers have used to make dynamic tariffs more appealing and effective for both customers and retailers themselves. Retailers like Tibber and Vibb have gone beyond traditional retail by bundling their dynamic tariffs with smart home management bundles, equipping customers with DERs, smart home equipment, and demand side management tools to ensure they get the maximum benefit from their tariffs. These companies make their money from the value-add activities, allowing them to offer pass-through rates at cost, leading to highly competitive headline prices.

The Issues

Clarity might be the biggest issue. It’s all very well to talk of savings for the average consumer, but how will these savings be achieved, and how can customers avoid painful peaks in their costs? Energy trading is difficult enough to get right for the professionals, so it is a bit ambitious to hope the average consumer will be primed to take advantage of wholesale price movements. And what if people lose out? Loss aversion is one of the most well-studied phenomena in behavioural economics for good reason. Dynamic tariffs can have price caps to prevent exposure to major fluctuations, as in the UK, but even there the caps are far higher than the cap given to fixed rate customers. 

The flip side of this is that if prices are not volatile, it is difficult to realise savings by switching consumption to different time periods. A study in Germany examined consumer expectations towards off-peak savings. Participants expected that by shifting washing and drying to off-peak periods they could make annual savings of 12%-30%. This level of saving simply isn’t realistic, even with the greater variability of dynamic tariffs. 

Incentives play a crucial role in encouraging adoption. Consumers need to see tangible benefits in terms of cost savings to motivate them to switch to dynamic tariffs and alter their consumption habits. However, the actual savings can vary significantly depending on individual usage patterns and the ability to shift consumption to off-peak hours. Suppliers face the challenge of demonstrating these potential savings convincingly while managing expectations realistically.

The experience of Australian retailers, and comments from consumer rights advocates, underline the need to bring customers on board with dynamic pricing, instead of forcing it onto potentially unwilling people. Not every household will be able to adjust consumption in order to take advantage of dynamic prices, and as with the UK a lot will depend on the availability of other hardware like EV chargers. 

To achieve a high level of saving from dynamic tariffs, consumers need access to devices which benefit from shifting consumption times - the two primary examples being EV chargers and heat pumps. This introduces another problem, as both require high up front investment to purchase, again placing a limit on interest in a dynamic tariff. 

The comprehensibility of tariffs is a key factor in customer acceptance. Complex pricing structures can be off-putting to consumers, potentially leading to resistance or confusion. Suppliers need to find ways to communicate the benefits and operation of dynamic tariffs clearly and simply.

Technical Barriers

The foundation for dynamic tariffs lies in advanced technological infrastructure. Smart meters are the cornerstone of this system, providing real-time consumption data essential for accurate pricing and billing. However, the problematic rollout has created a bottleneck for dynamic tariff implementation.

Beyond smart meters, energy suppliers must develop robust IT infrastructure capable of handling real-time pricing. This includes systems that can process vast amounts of data quickly and reliably, adjusting prices in response to market conditions. Such systems need to interface seamlessly with energy exchanges and forecasting systems, requiring sophisticated software solutions and significant investment in IT resources.

Interfaces with energy exchanges and forecasting systems are crucial for determining accurate pricing. These connections must be secure, fast, and reliable to ensure that tariffs reflect current market conditions and anticipated changes in supply and demand.

Challenges for Energy Suppliers

Energy suppliers face considerable challenges in designing and implementing dynamic tariffs. The complexity of tariff design is a significant hurdle. Suppliers must balance the need for pricing that reflects market conditions with the imperative to keep tariffs comprehensible for consumers. This often requires sophisticated algorithms that consider multiple variables, including time of use, overall grid demand, and renewable energy availability.

Data processing requirements for dynamic tariffs are substantial. Suppliers need systems capable of handling large volumes of data in real-time, processing information from smart meters, energy markets, and weather forecasts simultaneously. This real-time capability is essential for accurate pricing but demands significant computational resources and advanced data management systems.

Risk management becomes more complex with dynamic tariffs. Price fluctuations in the energy market can expose suppliers to financial risks if not properly managed. Suppliers need to develop strategies to hedge against these risks while still offering competitive rates to consumers. This may involve complex financial instruments and require expertise in energy trading and risk assessment.

Solutions

The evidence thus far suggests that dynamic tariffs are still struggling to make a big impact, with limited interest and low overall takeup. Europe has no choice in the matter and so retailers across the continent will have to implement some form of new product: the question becomes whether they should invest heavily to drive market growth or do the minimum for compliance. The evidence at least from the Nordics suggests that there is an opportunity there for a retailer that is brave and capable enough to claim it.

In the UK, Australia, and the US there is a bit more choice, except in Texas. Retailers have the time to wait for smart meter rollouts to finish in the former two countries, while in the US there is the opportunity to 'wait and see'. The moves of California retailers and public utilities in regulated states can provide a path to follow for cautious companies.

No matter what, major retailers will have to start thinking about their capabilities to succeed. Can they convince customers? Do they have the data processing technology required? Are their teams ready?

Gorilla works with retailers across the globe to implement new pricing solutions and offer competitive tariffs to business and residential customers. As such, we have first-hand experience with the different approaches retailers have taken when it comes to implementing dynamic pricing, and are ready to guide more companies. Get in touch today to see a demo.

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