A renewable energy projects I was involved in a couple of years ago resulted in a householder generating significantly more electricity than they could use each year. Our client was keen to find a way to sell the excess generation to a neighbour rather than back to the grid and so we looked at the practicality of doing so. That’s where we started up a steep learning curve about the UK electricity grid (a wonder of engineering) and the participants in the UK energy market.
We all take completely for granted that when we press a switch electricity flows and there is light, or our kettle boils. In the background, unseen, lots of very smart people are constantly juggling our ever changing demand with electricity generation. Balancing wind turbines, solar panels, power stations and other generators all over the UK as well as the connections to and from Europe. They know that at certain times demand will rise – at the end of popular TV soaps millions of put their kettles on. If there wasn’t a power station spinning and ready to go when we do that the lights would dim.
We also learned that the electricity we used yesterday will not be fully ‘settled’ for more than a year. The problem is that our suppliers don’t know how much power we used yesterday. They find out how much we used over a period of a few months when they get our electricity meter reading and by the time they get all of the readings for all of their customers a year or more will have passed. And they still don’t actually know what we used on a given day, it’s just a calculated value to allow the billing process to work.
On the supply side energy companies have to estimate what their customers will use and buy that power in the wholesale market from the generators. Every day is split into 30 minute chunks (48 of them, obviously) and every supplier must purchase the generation they think they will need for each chunk. Of course it’s only an estimate and in practice they sometimes buy too much and sometimes too little. A year later the sums are complete and the last of the money changes hands to reflect what was actually used against what was bought at the time.
We finally understood why people in the energy industry were getting so excited about smart meters. Instead of finding out how much electricity and gas was used months after the fact, they will find out every 30 minutes in close to real-time. In a world where everyone has smart meters all of the estimating and balancing that now takes a year or more to resolve just disappears.
Would any of this affect us, the customers, buying our electricity and gas from suppliers? We’re ‘in the business’ so we swap suppliers and tariffs as often as we can to stay on something close to the best tariff but about 2/3 of people had never changed suppliers or tariffs and most of us are paying much more than we need to for electricity and gas. A bit of digging unearthed the estimate of about 13 billion Euros across the EU as the amount by which the energy companies benefit because of our inertia. Why don’t people switch tariffs – we’re not talking about a few pounds, the average savings are hundreds of pounds each year for relatively little effort – £200 for 10 minutes of your time anyone?
A little more gentle digging unearthed the commissions that some of the energy companies pay when they get a customer switching to them. It’s obviously worth paying up to £50 for a new customer who will be too lazy to move for a year or two. Meanwhile the UK government has been getting very agitated about the unfair way they believe the energy companies are treating their customers. Government is driving change so that the process of switching tariffs that now typically takes a few weeks will be reduced to a few days and with the ambition to reduce it to 24 hours. The industry and government also have the problem of how to sell the benefits of the smart meter roll-out to us. It’s a cost to the whole industry, and of course in the end that means it’s a cost to us, the customers. Providing people with an in-home energy display is as far as they have got so far. Based on the (well documented) principle that when people become aware of their energy use it reduces by around 10% that’s a benefit, but they are struggling to identify a ‘killer app’ that they can link to smart meters.
Today, we have a dysfunctional energy market where people don’t switch suppliers despite the obvious financial benefit in doing so. The big suppliers are expert at appearing to help consumers get better deals. But of course it’s directly against their shareholders interest for them to do so. There is frequent publicity about switching along with the bad press that the energy companies receive, for example when falling oil and gas prices always take too long to reach the consumer. This has resulted in more people switching tariffs, but progress is very slow slow. For many reasons in practice it seems that we’ve all got better things to do than to keep checking for a better energy tariff.
So we imagined a better world for the consumer, where an application that knows how much energy you use would automatically keep track of all the new tariffs and work out whether there was a better deal for you. If you trusted it to do so it could also switch you to the better tariff when it appeared, all within whatever parameters you set it. If you only wanted to buy from ‘green’ suppliers or wanted to exclude certain suppliers it would handle that for you. The first app of this kind is already available from uSwitch, who have an iPhone app that will alert you to better tariffs.
It’s a start, but we believe something much more profound is going to happen to energy markets around the world in the next few years. In the UK consumers will one day be able to switch energy tariffs easily and quickly and then the commission based model can’t survive. As the energy market becomes more of a true market more and more small companies will start to challenge the dominant incumbents by providing targeted products. Smart meters will provide the data about actual use so that people won’t have to work out from complicated bills how much gas and electricity they really use. How will they attract new customers?
And then there is battery storage and electric cars… How will this affect the electricity market? Will we be able to buy and store power when it’s cheaper and use it when it’s more expensive? One thing is certain, consumers will find it more complicated than ever to work out the best supplier and tariff. So here we are, building an app that is specifically designed to identify for every consumer the best energy tariff available for them. It will run in the cloud and will allow consumers to forget about their energy supplier. This is a global market that is going to be radically changed in the next few years, and with any paradigm change there is always opportunity.