August 25, 2017
For European utilities, demand for dynamic pricing on the rise
By: Lasse Kari

The combination of flexible energy systems, fierce competition and regulatory changes is creating new demand for flexible pricing models in Europe. The retail sector is already starting to introduce first dynamic tariffs, and we should soon expect the grid operators to follow their lead.

Since the liberalization in most European markets, traditional power retailers have seen increased competition from asset-light pure retailers and non-utility entrants. Today, they are also facing a further squeeze from limited consumer price increases and increasing costs from the distribution system modernization and green subsidies. As a recent study by EURELECTRIC shows, wholesale prices have radically decreased and supplier operations have become increasingly efficient, which is driving costs down in most countries. The study also highlighted a growing number of suppliers without generation assets.

With a saturated incumbent market, one characterized by increasing churn rates, the primary objective for most European utilities is to incentivize their customers to stay while keeping costs under control. Dynamic pricing, also known as time-of-use or TOU, is an increasingly common way of achieving this and forms an essential part of effective demand-response programs. TOU pricing effectively incentivizing consumers to use more energy during periods of off-peak demand. In the United States, such programs have led to savings ranging from 2 to 27 percent on average for 10 percent of the utility peak demand. TOU pricing also enables energy retailers to optimize customer bills while reducing the cost of peak procurement or generation—a win-win for both parties. 

European Union incentives driving variable retail prices are expected to come into force by 2020 (with the potential to cut average annual household power bills by up to €400), but many national support schemes are already paving the way. In the Nordic states, spot-price-based consumer tariffs have been in place for years, while flexible prices are currently being rolled out as we speak in the United Kingdom. There is further value to dynamic prices if they are deployed alongside smart meter infrastructure and in markets with developed demand response or demand aggregation. 

The combined economic and societal benefits of variable tariffs related to optimized infrastructure are potentially unbeatable. Reduced need for conventional peak plants through peak pricing not only helps reduce investment and lower costs for the utilities, but also contributes to lower emissions and end-user prices. The appropriate pricing for integrating distributed energy resources (DER), such as rooftop solar and electric vehicle storage, can accelerate low-carbon generation and ultimately lead to a drop in consumer prices through lower distribution grid reinforcement.

European distribution grid operators (DSOs) are also about to grasp the power of TOU tariffs (though these are still not available for most operators), which is already being demonstrated in the United States. In New York and California, new regulatory models are enabling grid operators to either directly market additional services, such as demand response, or “piggy back” on third parties to reduce stress on the grid and the cost of new investment.

According to Accenture’s recent Digitally Enabled Grid research, European grid executives are now anticipating the new pricing or tariff models as the main regulatory change to come in the next 10 years. Network operators should prepare to manage new grid requirements by starting with more focused investments, employing lessons learned from the substantial business model disruption evident in the retail sector and from the US changes already underway.

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