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Surge pricing opens door to extreme energy bill shocks

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Texas households owed thousands to energy firms after prices soared when the power grid failed - Ana Ramirez-USA TODAY NETWORK/Sipa USA
Texas households owed thousands to energy firms after prices soared when the power grid failed - Ana Ramirez-USA TODAY NETWORK/Sipa USA

When a blast of Arctic wind battered Texas and triggered failures in the state power grid, those inside homes where the lights stayed on felt blessed.

But for 29,000 households on “dynamic” energy tariffs that illusion was shattered when bills for thousands of dollars arrived from their electricity providers.

The story highlights the riskier side of surge pricing, which can leave consumers vulnerable when unusual events or emergencies cause freak energy market swings. It is this type of tariff that British utility companies and the Government argue could also be key to the green energy transition.

They say introducing price incentives could help ease the strain on the power grid as we switch to a future of electrically powered cars and heating systems. In practice, people pay more for electricity at times when many households are using it, for instance when cooking dinner during the evening. Bargains could be had at quieter times.

The idea was endorsed earlier this month in Boris Johnson’s energy security strategy and by Kwasi Kwarteng, the Business Secretary, who claimed it “totally makes sense”.

Ofgem, the UK energy regulator, will next month gain the legal powers to begin the technical process that will make mass switches to surge pricing possible. Yet concerns remain about what can happen when things go wrong, at a time when confidence in the regulator has been shaken by the collapse of financially precarious suppliers due to unprecedented winter price spikes.

David Holt, the president of the US-based Consumer Energy Alliance, says the experience of Texas in February 2021 provides a cautionary tale of when large numbers of people embrace surge pricing with little understanding of the risks.

There, a company called Griddy let customers buy their electricity at wholesale prices in exchange for a monthly fee of about $10 (£7.70). Most of the time, this meant they saved money compared to less risky but more expensive fixed plans.

But when the Arctic storm hit, knocking out gas pipelines, causing power failures and sending wholesale prices soaring, they were left brutally exposed – racking up bills of thousands of dollars in mere days.

Barely a fortnight afterwards, one woman from Nevada, near Dallas, told The New York Times she had already been charged $6,200 for the month. Another man who lived in a Dallas suburb said his bill came to more than $16,700.

Holt, whose family was among those who lost power, believes this was the direct result of poor regulation and reckless planning by the authorities, who should have ensured the power grid was more resilient.

“Extremely hot weather and extremely cold weather is going to happen,” he says. “Part of our concern is regulations that inadvertently create situations that reward volatility.

“In Texas, the lesson we learned was that surge pricing simply adds to the costs and the unreliability of the energy grid.”

The concept of surge pricing, which British energy suppliers prefer to call “time of use” billing, has actually been around for decades. “Economy 7” tariffs marketed in the 1980s, for example, saw power companies charge households less during the small hours.

But newly proposed “dynamic” tariffs would go further, billing consumers on a half-hourly basis. It means the price of electricity would change up to 48 times a day.

Energy suppliers believe this approach will persuade a chunk of customers to avoid peak times, thereby reducing strain on the grid. In theory, it also benefits everyone on a grander scale because the bigger the reductions to peak demand, the less has to be spent on upgrading the electricity network.

This is set to become more important as demand increases with consumers switching to electric cars and heating. Octopus Energy has offered a form of surge pricing to customers since 2018 through its “Agile” tariff. It claims users reduce their peak demand by more than a fifth.

The amount paid by customers is capped at 35p per kilowatt hour, limiting the risk. The current average limit under the Government’s energy price cap is 28p per kWh for standard variable tariff customers – which lags behind market prices.

Since October, anyone on the Agile tariff would have paid the maximum rate almost constantly due to surging wholesale gas and electricity prices. Octopus currently recommends consumers choose different plans.

Yet Greg Jackson, its chief executive, is still an enthusiastic supporter of “time of use” tariffs, which he says will drive down costs for all – even if only some people opt in.

He compares the system to “yellow label” reduced food in supermarkets, arguing that when there is abundant energy available at less busy times, people should be able to take advantage of cheaper prices.

“By making use of the system when it’s under-utilised,” he adds, “that makes it cheaper for everyone, because you’re not adding to the demand for electricity at peak times.”

However, he argues that consumers should not be forced to adopt such tariffs and caps should be in place to protect against “wild swings”.

Martin Young, an energy analyst at Investec, agrees. He warms his home with an electric heat pump and is a former Agile customer at Octopus. Young “did his homework” before signing up and would not necessarily recommend the tariff to households who do not track their energy consumption closely.

“I think you need to be quite energy-savvy,” he says. “Suppliers need to help people understand the risks.”

Holt, however, questions whether it is right to expect households to change their behaviour.

These concerns have been echoed by Citizens Advice in the UK, which says surge pricing could penalise people who use round-the-clock medical equipment or those with older, less efficient appliances.

Peak demand in the evenings is also not due to everyone deliberately using power at the same time, Holt argues, but an unavoidable result of most working 9-5 to jobs.

“The notion of surge pricing, where you’re asking a single mother of three kids to change her behaviour, when it’s not possible – you’re just asking her to pay more. And that’s simply unfair.”

It is a dilemma ministers will have to ponder as they consider how – and if – to introduce surge pricing in Britain.

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