BEUC NEWS - 15.04.2022

With energy prices reaching record levels, consumers are rightly looking at ways they can make savings on their energy bills.

Dynamic electricity price contracts are increasingly available to consumers. With these contracts, the electricity tariff changes every hour and is linked to prices in wholesale electricity markets.

To assess the impact of dynamic price contracts - and how best to inform consumers about whether they could be suited to them - BEUC commissioned consultancy Cambridge Econometrics to carry out a report to examine the question.

The benefits

When renewable power production is high, such as sunny or windy days, or demand is low, for example during the night, consumers would pay a lower price for their electricity. If consumers are able to shift their electricity consumption to those times, for example by charging their electric vehicle in the middle of the day, they will be able to make important savings or even be paid for the electricity they consume. This is because at times of abundant wind or solar power production, it is sometimes more cost efficient for electricity producers to pay consumers to use energy rather than disconnect their facilities from the grid.

As many people are expected to continue working from home, shifting their electricity consumption should be relatively easy, as they would be at home in the middle of the day, when power prices are lower.

In addition, with the expected increase of the share of wind and solar power in the electricity mix, these contracts will become more financially interesting, as the time periods in which electricity is cheap due to abundant renewable power production, higher than the electricity demand, will increase.

The risks

However, despite the potential benefits, dynamic electricity price contracts are also connected to significant financial risks and may not be suitable for all consumers.

The results of the report illustrate the following:

• Dynamic price contracts can help consumers make saving, but only when the average variable electricity price is lower than the price of fixed electricity price contracts. However, this is currently difficult for consumers to assess, and data for 2021 showed that when wholesale prices suddenly increased for a sustained amount of time, this led to considerably higher electricity costs (and hence bills, potentially) for consumers.

• The main benefit could be for those with an electric vehicle (EV). EV charging is the highest single cost within flexible electricity consuming households’ activities. Smart EV charging could lead to savings for those households. According to a recent BEUC study, we highlighted that by switching to EVs, consumers could make savings, particularly if they have access to flat time of use tariffs (whilst dynamic tariffs could offer even bigger savings).

• However, the benefits from using white goods (such as a dish washer or washing machine) flexibly are relatively minor due to flexible activities’ small share of electricity consumption in the total bill.

• Although this was outside the scope of the report, we can expect that flexible use of electric heat pumps can also help consumers living in well insulated homes to make savings.

Several important policy implications

Firstly, consumers should be informed that there is a risk that, if they choose a dynamic electricity price contract, the price they pay for electricity may increase in the future, due to price fluctuation in wholesale electricity markets.

Secondly, electricity suppliers should properly inform consumers about the variations in electricity prices, as well as their past consumption levels, and how this would have compared with a fixed price contract, so that consumers can make informed choices.

Thirdly, consumers should also be sufficiently informed to be able to assess whether they can use their appliances flexibly – i.e. to be able to make a cost/benefit analysis on whether dynamic pricing could be worth it or not.

Lastly, consumers should be able to access trustworthy tools allowing them to estimate the potential savings that they could achieve by switching to a dynamic electricity price contract and by using their appliances flexibly. This is not the case in most European markets.

Read the full report.