Smart Time of Use (TOU) tariffs: are they fair?

What is a Smart Tariff?

To explain, we need some background on traditional tariffs.

Most tariffs have two elements:

1. A standing charge, the daily amount you pay to be connected to your energy supply.
2. A unit rate, the cost per unit of energy you use.

Then there are two ways that tariffs get more complicated:

• Time-of-use tariffs mean you pay a different price for your energy depending on the time of day, with a discount during certain fixed hours.
• An export tariff is where you can sell electricity back to the grid, for example if you have solar panels.

Smart time-of-use (TOU) tariffs combine these features to create a tariff with ‘dynamic’ pricing, meaning what you pay (and the amount you get paid for any surplus you generate) will change as often as every half hour.

These new tariffs can initially seem attractive because they offer opportunities to save on energy costs and even earn money from generating renewable energy.

However, the reality is that they can be be quite complicated and may not always deliver the expected financial benefits. TOU tariffs can lead to higher bills if you can't avoid using electricity during expensive peak times, while SEG tariffs often offer low payments for excess energy, making them less rewarding unless you generate a significant amount of electricity.

Here, we take an in-depth look at these tariffs, the challenges they come with, and why they may not be suitable or fair for the majority of energy customers.

What are Smart (TOU) import tariffs?

Smart tariffs, also known as smart time-of-use (TOU) and import tariffs, are a particular type of energy deal with two types – static and dynamic.

Static tariffs offer two or more rates for electricity at fixed times. A typical static TOU tariff would be an Economy 7 - where energy prices are cheaper during the night (usually between 12:00am and 7:00am) and pricier during the day. Static time-of-use tariffs are available on both a traditional and smart meter.

Dynamic tariffs are where prices constantly fluctuate throughout the day. They are also only available on a smart meter. This is because smart meters can send records of your consumption to your supplier every 30 minutes, allowing for this type of “dynamic” pricing.

For example, the smart TOU tariff, ‘Agile Octopus’ from Octopus Energy changes every 30 minutes in line with wholesale price changes on the energy market.

Energy regulator Ofgem has stated that dynamic tariffs are designed to encourage consumers to use electricity during times of the day where there is less demand on the grid – i.e. when fewer households are using electricity. Suppliers also claim that these tariffs help to balance the load on the grid and can lead customers to become more efficient with their energy use.

But the ever-changing pricing structure of dynamic tariffs not only makes them more complicated to keep track of, it makes them less transparent. It is because prices are changing so often, energy customers have no choice but to trust that their supplier is being honest with how much they are being charged.

What Are Export (SEG) Tariffs?

Export tariffs fall under the Smart Export Guarantee (SEG) scheme rolled out by the UK government In January 2020 as part of their target to achieve net-zero by 2050.

In essence, export tariffs are payments made by energy suppliers to households and businesses for the excess electricity they generate and feed back into the national grid.

All energy suppliers with more than 150,000 customers must offer an SEG tariff, but smaller suppliers can opt in, too.

These tariffs are most relevant for properties with renewable energy systems like solar panels, wind turbines, or other small-scale renewable installations.

What is the link between Import (TOU) Tariffs and Export (SEG) Tariffs?

So now that we know what import and export tariffs are, how are they related, and does one necessitate the other?

How are Smart TOU Tariffs and Export Tariffs Linked?

1. Independent Yet Complementary:

Import and export tariffs are offered by energy suppliers, but are independent from one another. I.e. energy customers can choose an import tariff that best optimises the cost of their consumption based on the time of day from one supplier (e.g., Octopus Energy), and then separately opt for an export tariff if they generate surplus electricity that can be fed back into the grid from another (e.g., British Gas).

2. Optimisation of Energy Usage and Production:

Households with renewable energy systems like solar panels can benefit from both TOU and export tariffs.

During off-peak hours, these households can use or store energy generated during peak sunlight hours when TOU tariffs are typically higher. If they generate more electricity than they use, they can sell the excess back to the grid under an export tariff.

3. Remember: there is no mandatory link

Energy customers are not required to have an export tariff if they are on a TOU tariff, and vice-versa.

However, for those generating renewable energy, having both can be advantageous. For example, a household can minimize costs by using their generated energy during peak times when TOU rates are high and maximize earnings by selling excess energy at beneficial export rates.

4. Supplier-Specific Conditions:

Some energy suppliers offer better export rates to customers who also use them for importing electricity under a TOU tariff. This is often a way for suppliers to create a bundled service offering that keeps the customer within their ecosystem.

What should I consider if I decide I want both a TOU and SEG tariff?

If you decide to opt for both an import and export tariff, there are a couple of things you should first consider:

• Choose the right supplier: When selecting an energy supplier, you should consider both the import and export tariffs on offer.
  
  Not all suppliers that have export tariffs will have import tariff options. But for those that do, they may provide more favourable terms when combining both.
  
• Understand the costs and benefits: The potential savings or earnings from these tariffs depend heavily on your household's energy consumption patterns and generation capacity.
  
  A time of time-of-use tariff has a complicated pricing structure that can be frustrating for energy customers to navigate. The need to monitor and adjust usage according to the time of the day requires effort and understanding that may not be straightforward for everyone.
  
  And, bear in mind that even with careful planning, unforeseen circumstances may force you to use electricity during expensive peak times, leading to unexpectedly high bills. This unpredictability can be particularly challenging for households with children, elderly members, or anyone with special needs that require consistent energy usage​

How can I get an export tariff?

To qualify for an SEG tariff you must:-

1. Be on a property that generates renewable electricity using certified systems, such as solar photovoltaic (PV) panels or wind turbines, and
   
2. The generated electricity must be exported to the grid through a “compliant meter” – typically a smart meter – which can accurately record the amount of electricity fed back into the grid.

What is the payment structure for an export tariff?

Export tariffs are paid out per kilowatt-hour (kWh) of energy exported. These rates can vary significantly depending on the supplier and specific tariff on offer, with ranges from around 4p to more than 30p per kWh.

Payments are usually made either as a deduction on your energy bill or as a direct bank transfer. The frequency of these payments can also vary, from monthly payments to annually.

What type of export tariffs are there?

There exists both fixed and variable tariffs for the SEG scheme. Fixed tariffs offer a set rate paid out per kWh, while variable tariffs will fluctuate depending on market conditions.

Which Suppliers Offer both Smart Time of Use (TOU) tariffs and Smart Export Guarantee (SEG) options

The below table offers a list of energy suppliers who offer both Import TOU tariffs and Export SEG tariffs:

Why is this potentially a problem?

There is a notable disparity in the rates offered for imports (TOU) and exports (SEG) tariffs.

Generally, import tariffs during peak times can be significantly higher, reflecting the higher costs associated with supplying electricity during high demand periods. In contrast, export tariffs, even during peak periods, are often lower than the corresponding import rates.

For example, Octopus Energy’s peak tariff, Octopus Flux, can reach up to 32.38p per kWh, while their export rate maxes out at around 30.31p per kWh during peak export times​​​​.

This trend is common across most suppliers, where the export rates rarely exceed the import rates, giving a substantial gap.

This pricing structure can also make TOU tariffs seem more appealing because the lower off-peak import rates may seem as though they can significantly reduce the overall costs for consumers who manage their usage effectively.

However, the lower export rates might not provide the same level of financial return for excess energy fed back into the grid, particularly during times when renewable generation (like solar) is high, and wholesale electricity prices are lower.

This setup may lead to a situation where suppliers are charging more for the electricity they supply than they pay for the electricity they receive from consumers, potentially benefiting more from these schemes than the consumers do.

However, it should be noted that consumers with significant renewable energy generation capability and smart usage patterns can still benefit from both TOU and SEG tariffs, despite the disparity in rates​​​​.

For these reasons, it is essential for energy customers to compare both TOU and SEG rates on offer, and carefully consider their energy usage patterns and generation capabilities in order to make the most financially and environmentally beneficial choices.

Is the pricing structure of import and export tariffs intentionally confusing to the point of exploitation?

The pricing structure of both import and export tariffs mean it can be difficult to know whether customers are actually benefitting from these deals, or simply whether energy suppliers are taking advantage of a complicated system to bamboozle customers.

Below are a number of reasons why it may appear that energy suppliers are using complicated tariffs to make even more money.

1. The variability of import tariffs

• Multiple Rate Periods: import (TOU) tariffs are designed with a complex, multiple rate periods throughout the day, including peak, off-peak, and sometimes even mid-peak period, with each having a different price per kWh. This complexity requires energy customers to have a detailed understanding of their energy usage patterns and the ability to adjust their habits accordingly, which is not always practical, for example families and individuals with strict schedules.
  
• Frequent Changes: Rates under import tariffs can frequently change based on market conditions and supplier policies, outside of the energy price cap. This makes it difficult for consumers to predict their energy costs and manage their consumption effectively​​.

2. There is a lack of transparency

• Unclear Pricing Information: Suppliers often do not provide clear, accessible information about when peak periods occur and the exact rates. This lack of transparency can lead to unexpected high charges, especially if you are unaware of the peak times and constantly changing rates.

3. The disparity in import and export rates

• Higher Import Rates: Import tariffs during peak times can be significantly higher than standard rates, sometimes exceeding 30p per kWh. For example, Octopus Energy’s "Flux" tariff charges up to 32.38p per kWh during peak hours​​​​.
  
• Lower Export Rates: Export tariffs, even the most competitive ones, typically offer much lower rates, around 5-10p per kWh, with only a few exceptions reaching higher rates like 30.31p per kWh under very specific conditions​​​​. This disparity means that consumers pay more for the electricity they use than they earn for the electricity they generate and export.

4. The strategic pricing set in place by energy suppliers

• Maximising Profits for suppliers: Energy companies set high peak rates to coincide with times of highest demand when consumers are less able to reduce their usage. This strategic pricing ensures maximum revenue for suppliers, often at the expense of the consumer​​​​.
  
• Limited Financial Benefits: While suppliers highlight the potential savings of TOU (import) tariffs and earnings from SEG (export) tariffs, the actual financial benefits can be limited. The high cost during peak periods often outweighs the savings from off-peak use and the earnings from exported energy​.

How smart TOU tariffs are unfair for you and good for your supplier

To understand why a time-of-use tariff, even when combined with an export tariff, can leave you at a loss, it’s a good idea to look at a real-world example.

Let's consider a household with a solar panel system under the Agile Octopus tariff:

Daily Usage and Generation:

• Morning (Off-Peak, Low Import Rates): The household uses electricity at a lower rate of around 10p per kWh.
  
• Midday (High Solar Generation, Low Import Rates): Solar panels generate excess electricity. The export rate might be around 5p per kWh.
  
• Evening (Peak, High Import Rates): The household consumes most of its electricity when rates are highest, potentially over 30p per kWh.

Financial Impact:

• Import Costs: Despite low rates in the morning, high evening rates drastically increase overall costs. For example, if the household uses 5 kWh during peak times (4pm - 7pm) at 30p per kWh, the cost is £1.50 just for that period.
  
• Export Earnings: Even if the household exports 10 kWh at 5p per kWh, they only earn 50p.

Punitive Spread:

• Import vs. Export Disparity: The cost of importing electricity during peak times is significantly higher than the earnings from exporting excess energy. In this scenario, the household pays £1.50 for 5 kWh during peak times but only earns 50p for 10 kWh exported. The punitive spread means the household’s net gain is minimal, and they may even incur higher overall costs despite generating renewable energy.