Navigant Research Blog

Consumer Choice in the UK Energy Market: The Year of the Tracker Tariff

— July 11, 2017

A year ago, I wrote a two-part blog post (part one and part two) about the surge in consumer choices in the United Kingdom’s energy market. A lot has happened since those articles were written—the second of which was published on the same day as the Brexit referendum results.

Energy price hikes made headlines over the 2016/2017 winter, as five of the Big Six energy suppliers (EDF, E.ON, SSE, British Gas, Scottish Power, and Npower) raised prices by 8%-15%. British Gas was the only exception, promising to hold prices until at least August 2017. These increases put a political spotlight on energy prices during the country’s general election in June—during which even the Conservative Party (generally associated with free market policies) proposed energy price caps.

The Year of the Tracker Tariff

Although the political debate has not devolved into any specific energy policies yet, small energy suppliers and new entrants (such as Octopus Energy, Pure Planet, and ENGIE) have used the price hikes as an opportunity to launch a new class of energy tariff: the tracker.

Prior to May 2017 (when the first tracker was launched), consumers in the United Kingdom could opt for either a standard variable rate (SVR) or a fixed price rate:

  • SVR: In a SVR tariff, the unit price of electricity can go up or down at any time. The supplier must notify the consumer of price rises (and of any other changes to the consumer’s disadvantage) but the price charged is completely at the supplier’s discretion. This is the most basic offering from energy suppliers and it is usually their most expensive. Consumers usually end up on this tariff after a fixed contract expires.
  • Fixed price rate: In a fixed price tariff, the unit price of electricity is agreed upon at the beginning of the contract and remains fixed for a certain period (often 12 months in the United Kingdom). This fixed price is usually below the SVR.

Energy suppliers have been criticized by Ofgem (the United Kingdom energy regulator) for widening the difference between their best rates and their SVRs. So, in a bid to win consumer’s trust through improved transparency, a few energy suppliers have launched tracker tariffs.

Retail Price Comparison by Company and Tariff Type: Domestic (Great Britain)

(Source: Ofgem)

Tracker tariffs resemble SVR tariffs in that the price the consumer pays for electricity changes with time; unlike SVRs, the price is not discretionary. Instead, it is linked to the average wholesale electricity price on the day of consumption.

The precise structure of the tracker varies from supplier to supplier. For example, Octopus Energy charges a fixed standing charge per day and then the wholesale price plus transmission and distribution costs, other regulated costs, taxes, and a fixed margin per kilowatt-hour consumed. Another supplier, Pure Planet, charges a fixed membership fee that includes all non-energy related costs and then wholesale prices for each kilowatt-hour consumed (100% renewable, in this case). ENGIE, the last of the companies offering tracker rates, has not yet disclosed how its tariff will be structured.

It is too early to judge whether consumers will embrace trackers or if they will prefer the certainty of fixed price rates. Perhaps the majority of consumers simply do not care enough about energy contracts and will continue to pay SVRs. Regardless, trackers are a step toward a residential energy as a service product. This is especially true of Pure Planet’s offering: by incorporating its margin into the fixed component of the bill, it is in a position to offer add-on services that increase comfort—or reduce energy consumption—without sacrificing profit margin.

 

Utility Customer Choice Coming to the UK Residential Solar PV Plus Energy Storage Market

— July 5, 2017

Two recent announcements foreshadow the emergence of the residential solar PV plus energy storage markets in the United Kingdom. Both E.ON and EDF Energy announced plans to launch solar plus storage programs. My colleague’s recent blog highlights the costs and self-consumption values of these offerings. I focus on how these announcements also exemplify three key drivers for the deployment of distributed solar PV plus energy storage:

  • Energy storage makes solar PV dispatchable. Energy storage addresses the greatest issue associated with solar PV: standalone solar PV systems only generate electricity when the sun is shining. Both E.ON and EDF Energy recognize that energy storage is a unique resource that can function as both generation (when discharging) and load (when charging).
  • Business and finance models are accelerating market adoption. Utility service vendors are now taking lessons from solar PV developers and finding simple, money-saving distributed energy supply and financing models that appeal to customers.
  •  The long-term value proposition for energy storage is strongest behind the customer meter. These offerings portend the possibility that E.ON and EDF Energy could add these solar PV plus energy storage installation to virtual power plant (VPP) software technology in the future to participate in ancillary services markets.

These new announcements, indicative of the drivers outlined above, create value for the utility customers and service vendors in three ways:

  • Residential retail electric choice customers can now access onsite backup power by means of a no-money-down option that can ramp to full capacity much faster than conventional resources for customer backup power.
  • By offering financing for these solar PV plus energy storage systems within the United Kingdom’s residential retail choice market, EDF Energy can now retain customers for a longer term than with traditional short-term, retail choice electricity supply contracts.
  • These types of battery energy storage-enabled distributed energy resources systems can create the potential for a future dispatchable VPPs. VPPs can maximize the grid value of self-generated solar electricity by customers to allow grid operators to minimize carbon-intensive peak energy generation and manage potential grid edge distribution system challenges.

Navigant Research recently highlighted global residential solar PV plus energy storage drivers in detail in our report titled Distributed Solar PV Plus Energy Storage Systems. Given these recent UK market developments, Navigant Research anticipates that more of these types of innovative, customer-focused utility services offerings will come to the marketplace.

 

Enterprisewide Financing Innovation Needed to Drive Energy as a Service Delivery

— July 5, 2017

In my most recent blog post, I examined how corporate commercial and industrial (C&I) energy and sustainability managers, after years of having no say in how they procure energy, are choosing to apply new technology and business model innovations to meet sustainability needs. Navigant Research anticipates these needs will contribute to the emergence of new energy as a service (EaaS) solution offerings and deployment models underpinned by financing innovation and a desire by customers to avoid spending capital on energy projects. I will highlight how these EaaS solutions and deployment models are brought to the market in an upcoming Navigant Research report titled Energy as a Service.

Currently, C&I customers attempting to implement energy efficiency and/or distributed generation projects are already using EaaS solutions, typically from pure-play solutions providers. For example, solar PV developers use project finance instruments such as solar power purchasing agreements, while energy efficiency implementers can deploy shared cost savings-based energy services performance contracts. Both EaaS financing instruments allow customer to implement projects without deploying their own capital. But until recently, there were fewer options for customers to deploy EaaS using financing innovation on an enterprisewide basis.

Enterprisewide Financing Innovation

One deployment model that is poised to drive the growth of EaaS solutions is called the outsourced managed energy services agreement (MESA). In a MESA, customers with large portfolios of small and medium-sized C&I buildings will look to outsource their entire management operations for a fixed annual payment over an extended period. The MESA concept shown below highlights how this type of EaaS deployment model might work.

Basic MESA Structure

(Source: Wilson Sonsini Goodrich & Rosati)

At the heart of a MESA is a turnkey EaaS provider with deep project development and technology expertise across multiple EaaS disciplines. These vendors will also have the capability to deploy financing innovation to overcome customer simple payback capital deployment hurdles. The MESA concept allows the EaaS provider to assume turnkey responsibility for enterprisewide energy management, including utility bill payment, in exchange for a series of annual creditworthy payments over 10, 15, or more years based on the customer’s historic energy management costs. This approach allows the MESA provider the flexibility to pursue energy retrofits or solar PV deployments under long-term financing arrangements should the customer lack the expertise, risk appetite, time, or capital to do so themselves.

As several of my recent blogs have highlighted, the need for interested EaaS stakeholders to create and apply financing innovation is critical to the deployment of new distributed energy resources. The MESA is a prime example of an innovative financing approach that can be applied on an enterprisewide basis to meet the customer needs to reduce energy spend and lower greenhouse gas emissions while overcoming the capital deployment and technical expertise barriers they face.

 

A Roadmap to the Coming Hydrogen Economy in One Chart

— July 5, 2017

Hydrogen has been discussed as a future energy carrier for decades, though infrastructure challenges and high cost seem to always keep broad adoption in the hypothetical realm. However, as the cost of electrolyzers and renewable energy continue to tumble and climate policies tighten, hydrogen is again experiencing renewed global interest.

Versatility and Disruptive Potential

Hydrogen’s versatility boosts its appeal as an energy carrier. It is the only energy carrier that has significant disruptive potential across the world’s energy-consuming segments: power, transport, industry, and heating. Electrolytic hydrogen—which comes from splitting water molecules by electrolysis, often with renewable electricity—is broadly seen as the key to clean hydrogen.

As seen in in the following chart, electrolysis remains expensive today. This is because electrolyzer capital costs have not fallen much below $1,000/kW. Renewable electricity costs, while falling dramatically, remain relatively high compared to a very high penetration future. But as those two costs fall, as is projected through 2025 and beyond, the cost of clean hydrogen falls substantially.

Hydrogen Cost Comparison with Other Energy Carriers, World Markets: 2017, 2025, and Beyond

Notes: Commodity costs include representative data from California, Germany, and Japan. Electrolytic hydrogen (2017) based on DOE data and actual filling station costs, while future prices presume large-scale (100 MW) systems with continued declines in both cost of renewable electricity and electrolyzer capital costs. SMR is steam methane reformation.

(Sources: Navigant Research, US Department of Energy, International Monetary Fund, International Energy Agency, California Energy Commission)

Hydrogen Use in Transportation

Transportation, which favors expensive energy-dense fuels, is among the more attractive uses for hydrogen. Indeed, electrolysis is providing a growing share of hydrogen to rollouts of both passenger vehicles and heavy duty vehicles like buses—in places such as China, California, Germany, and the United Kingdom. The success of battery EVs (BEVs) represents a major hurdle for hydrogen, though there is growing reason to believe that both energy carriers will be embraced. For example, the range-extending capabilities of hydrogen on battery vehicles are continuing to improve.

Other Hydrogen Uses

Hydrogen is also highly valued by industry as an important process input to production of ammonia, glass, and metals. Industrial uses represent an existing hydrogen economy that can be decarbonized and made more efficient by renewable hydrogen. Finally, hydrogen could revolutionize power generation and heating through fuel cells or other thermal generators, though it is expensive compared to natural gas, especially in the United States with its ongoing shale gas boom. Still, if the aggressive cost decline targets are met, even these two heavily polluting segments could be disrupted by hydrogen energy.

Hydrogen detractors correctly point to the infrastructure challenges of hydrogen storage, compression, and transport and the steep cost declines needed. If those hurdles can be cleared, this chart may hold two additional reasons for optimism: carbon pricing and hydrogen’s efficiency bonus. Carbon pricing, which is on the rise, makes hydrogen more attractive, as it displaces fossil fuels. Finally, comparing by units of energy hides a key efficiency bonus of hydrogen: it is often twice as efficient as the fossil fuels it replaces. This is because both stationary and vehicular fuel cells can be around 60% efficient, which is roughly twice the efficiency of combustion-based technologies after losses.

A Roadmap to Future Energy

This chart can be considered a roadmap to an eventual hydrogen economy. Electrolytic hydrogen is already competing with fossil fuels in the transport and industrial segments, and will continue to grow its market share. Provided the favorable carbon policies and cost declines continue, hydrogen has the potential to be the best and most versatile energy carrier of the future.

 

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