What do changing energy tariff designs mean for consumer protection?

Smart meters are creating new possibilities for energy tariffs — but customer protections must still come first

Last weekend, thousands of households were paid to use energy as wind farms generated high levels of renewable power. Customers were encouraged to use additional energy in certain overnight periods — and were paid up to 5.6p for every kilowatt-hour of electricity used.

The arrival of smart meters — and the new data they make available — mean energy suppliers are starting to offer new types of tariffs. The customers who were paid to put on laundry or charge an electric vehicle in the middle of the night were on Octopus Energy’s ‘time of use’ tariff. Time of use tariffs encourage people to avoid periods of peak demand, and use electricity at times when more is available cheaply, in this case when wind turbines were generating a lot of energy. By accommodating more renewables on the grid these products can help us meet our net zero carbon targets.

But, to get the most benefit from these tariffs, customers need to change their behaviour. We spoke to a number of customers earlier this year and found they were worried these tariffs could limit their control over their energy use and lead to higher costs.

To understand more about how companies are protecting customers against these risks we looked at 5 tariffs offered by 3 energy suppliers. Using publicly available information and some interviews with the companies, we identified best practice other companies should consider when offering these tariffs.

How time of use tariffs work

The time of use tariffs we looked at were structured in 2 main ways. Most were ‘static’ tariffs, which charge 2 or 3 different rates for set times of the day, which customers are told in advance. 2 were ‘dynamic’ tariffs, which fluctuate in price every half hour depending on electricity supply and demand. Some tariffs are no longer available or are not available to the general public.

Getting people signed up

The 2 small-scale projects (Energywise tariffs and the Bethesda pilot project) targeted fuel poor or disengaged customers. They used doorstep selling, phone calls, or letters to recruit customers. To protect consumers during the sales process the companies took measures including:

• training door to door sales-staff to offer accurate advice
• ensuring door to door sales staff are knowledgeable about the tariff, and ideally come from the local community
• pairing male and female salespeople

These companies also considered vulnerability in tariff design. Customers on prepayment meters may be at higher risk of harm as they can be disconnected if they run out of credit. 1 company excluded these customers from the tariff, while the other offered a tariff that gives a rebate for energy saved during the high-peak times (rather than charging more for these hours). A risk assessment was also carried out to ensure participants didn’t reduce their heating to unsafe levels.

It’s important to take steps to protect people in vulnerable circumstances — but it’s also crucial to include these customers in trials for new energy services and products to help companies understand how they work for people with a range of needs. In our Future for All report, we highlighted how customers who are less engaged or have certain vulnerabilities are at risk of being excluded from the benefits of innovative services. A trial setting is the best place to safely test new offerings with a range of customers.

The 3 tariffs offered to all customers were mostly sold online, mainly through supplier websites. Because detailed usage data is required to make an accurate comparison these tariffs aren’t included on price comparison websites yet. As a result, companies offering smart time of use tariffs found it hard to reach a wide customer base.

Ongoing customer support

The energy regulator, Ofgem, already has rules in place that mean suppliers need to make sure that customers have the information they need to get the most out of their tariff, and understand whether there are better alternatives available from their supplier.

To help meet these aims, the smaller projects offered support including:

• online resources with tips on how to change behaviour
• face-to-face advice and support
• sessions where participants in the trial could meet and discuss their experience
• newsletters with updates and advice on behaviour change

The other companies primarily offered support online, including access to:

• energy saving advice about programming appliances, electric heating and electric vehicles to take advantage of the static off-peak rates
• blogs, social media posts and an app advising and prompting customers to change their energy use
• an online forum where customers can ask each other questions.

Companies offering time of use tariffs should monitor outcomes to make sure their customers are benefitting. 1 of the small projects monitored their customers’ understanding of the tariff. They discovered that some customers who signed onto the tariff mistakenly thought that they should use more electricity at peak times. Correcting this belief was key to the tariff being used successfully.

We also think people should be able to contact their company for help in a way that works for them. All the companies offered customers a standard customer service phone line, but some took further steps, such as:

• recognising that customers on time of use tariffs might require extra help and dedicating a phone line to them with 1 agent per 20 households (as opposed to 1 agent per 2000 households for usual tariffs)
• offering a freephone number for customers who signed on to a time of use tariff as part of a trial
• diverting challenging questions about the time of use tariff to management from the usual phone line

Rather than simply helping customers change their behaviour to benefit from cost savings, companies can also build protection into the product design. For example, the dynamic time of use tariffs (where energy can peak depending on market rates) we looked at capped the maximum energy unit rate that customers could be charged in occurences of excessively high prices. This aligns with recommendations we’ve made that companies offer guarantee to limit consumers’ financial risk, in order to protect them and give them confidence to use the product.

Letting customers leave

While smart time of use tariffs should be marketed in a way that enables customers to make informed choices, some people may still find that a time of use tariff they sign up for costs them more. Sometimes life changes — becoming a parent or suffering long term ill health, for example — could change how they need to use energy. Consumers shouldn’t be trapped on a tariff that doesn’t work for them. All the tariffs we looked at allowed customers to switch away or move to another tariff without exit fees.

Where next for time of use tariffs?

The steps being taken to protect consumers on smart time of use tariffs are a good start. These tariffs are new products in the early stages of a quickly developing energy market. As further products and services are developed we think it’s important that:

• information about energy offerings should be made transparent and accessible so consumers can be confident to try new products
• price comparison websites should include complex time of use tariffs on their comparison pages or feature a specialist section for these tariffs
• all consumers who want to should be supported to try different offerings
• consumers should know they’ll be supported, put in control of their energy outcomes, and protected when faced with vulnerabilities

Time of use tariffs aren’t for everyone. But, these steps should give more customers the confidence to take up the innovative products — including newer time of use tariffs — that help us reach our carbon net zero goals.