Our previous post focused on reasons to be ready for MHHS and was aimed predominantly at Suppliers. Here we focus on the new opportunities MHHS will offer to a broad range of product and service providers – including Suppliers, network operators, aggregators, technology providers, asset providers and financiers.
The overall system costs of producing and delivering electricity differs month to month, day to day, and half hour to half hour. Production costs are a function of the energy mix – and how much wind and solar generation is available – and the price of gas and coal. Delivery costs are a function of the investment required to construct, maintain and balance the national and local electricity networks so that they continue to deliver energy to consumers, including at times of peak use.
The electricity market prices reflect the temporal differences in overall system costs. Some might say that they could do so far better – and that is a topical subject in its own right – but the cost of the energy and its delivery at any one point in time is, nonetheless, inherently in the market prices that Suppliers pay for the energy that their customers use.
However, the Non Half-Hourly (NHH) settlement arrangements – which currently cover almost all domestic and small business consumers – don’t directly consider when each consumer actually uses their energy. Instead, they assume all consumers use it according to one of a handful of standard usage profiles.
So, for example, Miss Jones is up and out of her house first thing in the morning, and uses the vast majority of her energy soon after she gets back in the early evening, when the overall system costs are high. Mr Smith, on the other hand, is retired and uses a big proportion of his energy in the morning, when the overall system costs are relatively low. The NHH settlement arrangements assume they both use their energy at the same times. Crucially, this means they each cost their Supplier the same amount.
This effect creates a disjoint between the price signals inherent in the electricity markets and the point at which electricity usage decisions are ultimately made – by the consumer. In short, it blunts the market price signals and their ability to influence demand and the overall energy system. It also denies consumers products and services that can provide them with their energy needs at price that is better for them. This will change!
Achieving net zero will require far more dynamic flex in our energy system. The intermittency of renewables such as wind and solar will impact the amount of green electricity that can be produced at any point in time; and the large increase in the need for electricity, because of the uptake in electric vehicles (EVs) and widescale electrification of industrial processes, for example, means we will increasingly need to optimise the capacity available in the delivery networks.
MHHS will enable dynamic flex at scale – with the electricity markets providing price signals that reach consumers, and innovators providing services and products, based on these signals, that allow consumers to obtain their energy in a way that suits them and their lifestyle, at an advantageous price.
This innovation could be as simple as a Supplier providing an EV charging tariff that offers cheaper energy during the night, when it is green and plentiful, and the delivery network is not challenged. Or it could be far more complex, such as an all-encompassing ‘home energy management service’ that does not require any consumer intervention or worry – comprising a ground source heat pump, rooftop solar panel, loft battery, EV charge point, with energy being arbitraged to and from the grid (delivery network), as required, to match the consumer’s bespoke lifestyle requirements, such as their home temperature and EV car range requirements – at the best price – with options for them to easily manage these requirements via an app.
Taking advantage of MHHS in this way will require service innovation that brings together technology-based solutions, market interfacing commercials and regulation-based market rules. The opportunity for both existing and new industry players is vast – with a need for low carbon technology assets that underpin such services to be financed and deployed in millions of homes and businesses, and smart digitalisation to realise optimal benefit from them.
Now is the time to be developing these propositions – considering what consumers will want, as their engagement with energy changes; how technology could join up to provide this; what business models could work; how the markets and price signals could evolve; what the regulatory landscape is and what changes are needed; and what the risk and impact of regulatory market intervention is.