The Value of TOU Tariffs in Great Britain: Insights for Decision-makers Volume I: Final Report PREPARED FOR PREPARED BY The Brattle Group Ryan Hledik Will Gorman Nicole Irwin University College London (UCL) Michael Fell Moira Nicolson Gesche Huebner July 2017 This report was prepared for Citizens Advice by The Brattle Group and University College London (UCL). All results and any errors are the responsibility of The Brattle Group and UCL and do not represent the opinion of their clients. Acknowledgements: We would like to acknowledge the valuable project management and conceptual contributions of Simon Moore, Clare Silcock, and Morgan Wild of Citizens Advice. We are also grateful to several industry stakeholders for generously taking the time to speak with us about this important issue. Finally, we are highly appreciative of Brattle colleague Serena Hesmondhalgh for her critical contributions to the power systems modeling described in this report, and to Ahmad Faruqui and Neil Lessem for peer review. Please direct inquiries to: Citizens Advice: Morgan Wild, [email protected] The Brattle Group: Ryan Hledik, [email protected] UCL: Mike Fell, [email protected] Table of Contents Glossary of Acronyms ............................................................................................................................ i Executive Summary .............................................................................................................................. ii Introduction ................................................................................................................................. ii Methodology ................................................................................................................................ ii The Value of TOU Tariffs .......................................................................................................... iii The Consumer Appeal of TOU Tariffs ...................................................................................... iv Recommendations ...................................................................................................................... vi I. Introduction ................................................................................................................................. 1 Unique Study Features ................................................................................................................ 2 Important Considerations ........................................................................................................... 3 Organization of the Report ......................................................................................................... 4 II. TOU Valuation Methodology ..................................................................................................... 5 Overview...................................................................................................................................... 5 Determinants of TOU System Value .......................................................................................... 6 Market Scenarios ......................................................................................................................... 7 Avoided Costs .............................................................................................................................. 9 TOU Tariff Designs ................................................................................................................... 16 Enrolment Rates and Per-Participant Impacts ........................................................................ 17 III. The Value of TOU Tariffs ......................................................................................................... 20 Twelve Key Findings ................................................................................................................. 20 Summary .................................................................................................................................... 31 Putting the Results Into Context .............................................................................................. 32 IV. Consumer Acceptance of TOU Tariffs: An Evidence Review ................................................ 35 Consumer Attractiveness of TOU Tariffs ................................................................................. 35 Consumer Satisfaction with TOU Tariffs ................................................................................. 38 Customer Responsiveness to TOU Tariffs ................................................................................ 40 V. TOU Marketing Considerations: Primary Market Research................................................... 44 Introduction ............................................................................................................................... 44 Tariff Design .............................................................................................................................. 44 Marketing ................................................................................................................................... 46 Critical Peak Rebates ................................................................................................................. 48 Direct Load Control................................................................................................................... 49 TOU Tariffs and Trust ............................................................................................................... 50 VI. Conclusions and Recommendations ......................................................................................... 52 References and Additional Resources ................................................................................................ 57 ii | brattle.com Glossary of Acronyms BAM Brattle Annual Model BEIS Department for Business, Energy & Industrial Strategy CBT Irish Consumer Behaviour Trial CLNR Customer Led Network Revolution CONE Cost of New Entry CPP Critical Peak Pricing CPR Critical Peak Rebate DNO Distribution Network Operator EV Electric Vehicle GB Great Britain HP Heat Pump iTOU Inverted Time-of-Use LCL Low Carbon London NPV Net Present Value PRISM Price Impact Simulation Model RTP Real-time Pricing TOU Time-of-Use UCL University College London WPD Western Power Distribution i | brattle.com Executive Summary INTRODUCTION New developments are changing the way households consume electricity in Great Britain (GB). A market for smart home appliances is emerging, electric vehicles (EVs) are expected to become more prevalent, and a nationwide rollout of smart meters is underway. Retail tariff structures may also evolve as part of this trend. A possibility that is receiving particular interest is the provision of time-of-use (TOU) retail tariffs to domestic customers. TOU tariffs more accurately reflect the time-varying nature of electricity costs than current tariff offerings. Rather than charging customers a flat price regardless of when electricity is consumed, prices in TOU tariffs vary by time of day. The price signal can be static (i.e., the same every day) or dynamic (i.e., changing in response to system conditions). The price signal in TOU tariffs gives customers an incentive to shift their electricity consumption to lower-priced hours, providing bill savings opportunities and an associated potential reduction in overall power system costs. TOU tariffs are also often discussed as an important enabler of the adoption of new home automation technologies. While some prior studies have quantified the potential value of TOU tariffs to the power system, and other studies have explored the value of TOU tariffs to consumers, there has been little research that has systematically combined these considerations into a comprehensive view of the overall value of TOU tariffs. To fill that research void, Citizens Advice commissioned The Brattle Group and University College London (UCL) to conduct a study on TOU value. This study addresses two key topics: (1) quantifying the system value of TOU tariffs in GB and assessing the market conditions under which that value will materialise, and (2) exploring consumer preferences for TOU tariffs. METHODOLOGY There are several novel features of the study design: Our assumptions about customer enrolment and price responsiveness are informed by a comprehensive evidence review and additional primary market research. Enrolment assumptions are based on a “rapid review” which drew on an initial pool of more than 4,000 studies to identify the existing research on the consumer appeal of TOU tariffs. Price response assumptions are derived from a review of the results of more than 40 domestic pricing field trials and over 20 meta-studies on consumer price response. To supplement this review, we surveyed 3,000 domestic energy bill-payers in GB to assess preferences for TOU tariffs in further detail. System benefits are quantified through detailed modelling of the drivers of marginal costs and the ability of TOU tariffs to avoid those costs. We utilized a sub-hourly power generation dispatch model to capture the energy market dynamics that are driven by different demand and supply scenarios (e.g., growth in adoption of renewables or electrification of heating and transportation). The ability of TOU tariffs to provide capacity value was modelled in a way ii | brattle.com that accurately