How to benefit from dynamic electricity tariffs

Disclaimer: This article suggests that readers should consider the Agile dynamic electricity tariff offered by Octopus Energy. For the avoidance of doubt, I have no personal or commercial connection with Octopus Energy other than being one of their electricity supply customers. As the article explains, I am one of the founders of Polare AI whose trial service is described below.

Despite lamentable design and management, the program to smart meters in the UK is progressing, so that more than 40% of electricity connections are served by smart meters. UK electricity customers with smart meters can opt for either (a) off-peak/peak or multi-period tariffs such as the Economy 7, or (b) dynamic tariffs by which the half-hourly or hourly price is linked to the wholesale market price.

As I will explain in another article, this is the beginning of a fundamental shift away from retail electricity charges that are identical for every hour in the day and over periods up to a year or more. In Italy, Netherlands, Spain, and most of Scandinavia, multi-period or dynamic tariffs are the norm. In the EU, under a directive adopted in 2019 all medium and large electricity suppliers will be required to offer dynamic tariffs as programs to install smart meters are implemented. In the UK, the availability and take-up of dynamic tariffs is likely to increase rapidly as the impact of increasing reliance on intermittent generation from wind and solar power on market prices feeds through.

I had a smart meter installed by Octopus Energy, my energy supplier, in July 2023. This is long enough to compare the Octopus Agile dynamic tariff against their standard fixed tariff, which varies every quarter based on the retail price cap set by Ofgem. Since I was on the fixed tariff for the whole of this period, I made no attempt to change my pattern of electricity use. I have extracted my half-hourly electricity consumption for the whole of 2024 and calculated the electricity charges, excluding the daily connection charge, under the Agile tariff and the capped fixed charge.

One frequent objection to dynamic tariffs is that customers may find themselves paying very high tariffs with little warning and limited ability to adjust consumption. In practice, it is easy for any energy supply to offer insurance against price spikes, capping the price charged in return for a modest premium recovered over all periods. Octopus offer that service by capping the cost charged at £1000 per MWh or £1 per kWh (excl VAT). The base Agile tariff is set equal to 2.2 times the wholesale price subject to the stated maximum. In 2024 the cap applied for only 5 half-hour periods between 16.00 and 18.30 on 12Dec2024. As compensation for rare price spikes, Agile customers paid negative prices for their electricity in 309 half-hour periods during 2024.

Over the whole of 2024 the total charge for electricity usage was £1,097 (including VAT) for the capped fixed tariff, but this would have been only £891 if I had been on the Agile tariff. Thus, the Agile would have given a saving of £206 before allowing for any difference in the daily connection charge, which varies by location because of differences in transmission and distribution costs.

However, I should emphasise that the Agile saving varies greatly from month to month. In March 2024 the Agile saving was £44, whereas in December 2024 the cost of electricity under the Agile tariff was £15 greater than for the capped fixed tariff. The reason is that electricity prices in the wholesale market rose in the final quarter of 2024. That increase was passed on immediately to Agile customers. In contrast, wholesale electricity prices fell during the first quarter of 2024 and Agile customers benefitted from the change.

This is the crucial point that anyone contemplating a switch to a dynamic tariff must understand. On average, over a year or several years the cost of electricity is likely to be lower for customers on a dynamic tariff than for those on capped fixed tariffs. That is because the customers on dynamic tariff are being paid to accept the risks associated with daily and monthly variations in market prices that would otherwise be borne by the electricity supplier. However, as with any transfer of risk (or insurance), in some months the expected saving may be outweighed by adverse movements in market prices.

Any UK reader with a smart meter who understands and is willing to accept the risk of monthly variations in prices is likely to make a significant saving on their electricity bill on a dynamic tariff such as the Agile tariff offered by Octopus Energy. The net monthly saving is far from certain. There will be months such as November and December 2024 in which the cost of electricity with the Agile tariff will exceed its cost with a capped fixed tariff. Still, an overall saving of just over 18% over a year is quite generous compensation for bearing the risks of variations in market prices.

This saving is not based on any change in our pattern of electricity consumption, for example by running electrical appliances during off-peak periods. The advertising for smart meters focuses heavily on such opportunities, but for most households this is bothersome and saves relatively little money. Dishwashers and washing machines can be run overnight but these appliances account for a small fraction of our electricity consumption. Some of our consumption is inflexible such as IT equipment, cooking and lighting. In addition, patterns of when market electricity prices are high and low are less consistent than simple advertising messages imply. Of course, avoid from 16.00 to 20.00 in the middle of winter, but when are prices lowest or highest in the middle of summer? The within-day variations in price are large: the highest price in any day is typically more than double the lowest price in the same day.

Managing electricity consumption to gain maximum benefit from variable prices is a problem that is ideal for the application of automation based on machine learning. Because it involves the collection and analysis of various types of data, manual control of heating, cooling, and other appliances that use a lot of electricity is time consuming and requires substantial IT skills. Few of us want to do this consistently every day for years.

This is why I set up Polare AI, a start-up company that focuses on developing both software and hardware that can enable households and small businesses to reduce their electricity bills by automatically taking advantage of the variations in market prices via dynamic electricity tariffs. Large electricity users have had access to this service for some time, but, to our knowledge, we are the first to offer it to the domestic consumer, for whom the savings are greater than with industry.

In essence, Polare performs a daily balancing function. First, a thermodynamic model combines weather, location and property data to understand when your heater needs to be on to meet the user-set temperature for that day. Second, those time periods are matched with the optimal (cheapest!) prices. Result: a thermostat that is price-aware, weather-aware, and understands the heat characteristics of your space – three critical elements to lowering the cost of heating that are absent from even modern heating systems.

The reason for this self-advertisement is that Polare AI is starting a trial of our first set of software and hardware. We are looking for volunteers who are willing to try out the service at no cost. It is designed to control electric heaters used for heating a home office and/or other room during periods when it is not worth heating the whole house or apartment. It will work with any peak/off-peak, multi-period or dynamic tariff, but cannot work with fixed tariffs.

If you might be interested in participating in the trial of our first product, please go to: splash.polare.ai/trialuk.

As with any start-up, we are dependent on a few curious souls taking a chance on us, so if you know anyone who might be interested, please take a moment to pass this on to them too.

To learn more about what the Polare service does and how you can sign up for the trial, please click on the Polare AI link which provides more of the background and explanations.

In summary, if you are willing to accept month to month variability, choosing a dynamic tariff like the Octopus Agile may save many UK electricity customers a significant portion of their regular electricity bill. This need not involve any change in how you use electricity.

If you are on or moving to one of the dynamic tariffs, and if you use an electric heater, consider joining the Polare AI trial for free. Whether you are or are not eligible, please pass this information on to any relations or friends who might be interested.