The complete Dynamic Pricing guide for energy retailers

Whether your headache is how to implement dynamic pricing per the EU Directive or how to optimise the uptake of dynamic tariff contracts, we’ve got it all covered. Eliq’s guide explains everything about dynamic energy pricing, from the definitions and the 101s to EU-approved best practices and ways of maximising gains for everyone.

What is dynamic energy pricing?

In general, dynamic energy pricing or dynamic tariffs is a type of contract between the electricity supplier and the customer, where the price of electricity varies depending on the time of day, month, or year. The prices can be determined by a range of variables, such as wholesale electricity price, electricity demand and supply, and availability of electricity from renewable sources.

However, as more specifically discussed around Europe recently, dynamic electricity pricing is a supplier-customer contract where the electricity retail price reflects the wholesale price as closely as possible to the energy market. The price is determined either the day before or during the day.

– Are smart meters necessary for dynamic pricing?

Smart meters are necessary for certain types of dynamic tariffs – namely the ones where prices vary at frequent time intervals. For example, for a price variation between day and night charge that is stable for months or even years, smart meters are not necessary. For dynamic pricing that changes every day at e.g., hourly rates, and reflects wholesale prices, then a smart meter is necessary.

But before we spread ourselves too thin with categorisations, let’s take a much-needed look into the types of dynamic tariffs. 

What are the types of dynamic tariffs?

The types of dynamic pricing determine the prerequisites for each type, what determines the price, who it works best for, and how it can be best implemented. The range of dynamic pricing spans from fixed times of the day to 15-minute real-time intervals and corresponds to an analogous risk premium.

Types of dynamic energy tariffs

-Time-of-use (TOU)

Time-Of-Use pricing is determined by different charges for different, predefined times of day. These times of the day are fixed and the prices are stable for a longer period. TOU is the oldest type of dynamic pricing as it is possible to implement without a smart meter, with the most prominent example of day and night charges.

-Critical Peak Pricing (CPP)

Critical Peak Pricing refers to a significant price difference among different events. These events, called critical peak events, are less predictable than the TOU, occur less frequently, last a few hours long, and are announced ahead of time. Critical peak events are usually determined by times of extreme demand, extreme weather events, or times of high stress on the grid. Consumers are informed about critical peak events in a more reactive way than TOU pricing. CPP can be designed in two different ways relative to the critical peak events:

–Low CPP

In Low CPP, any consumption that doesn’t occur during a critical peak is placed at a lower price tier but is still charged higher than consumption during off-peak hours. Low CPP implies that consumption during this tier happens more frequently than critical peak events.

–High CPP

High CPP translates to putting higher charges on critical peak events relative to a stable off-critical peak event tier. High CPP implies that critical peak events are rare and quite severe.

-Real-Time Pricing (RTP)

Real-time pricing, the dynamic tariff favoured by EU regulators, is the retail energy price that reflects the wholesale market price. The RTP price is updated daily and the charge reflects the energy user’s actual consumption during the day. RTP tariffs are not possible without smart meters.

The different types of real-time pricing are determined by when the price for any of these intervals is set and depending on this, the price variation can occur every hour, 30 minutes, or 15 minutes.

–Day ahead RTP

The price for every hour of the day is set and shared with energy users the day before, thus giving consumers a day’s notice to plan their consumption. 

–Intraday RTP

The price per kWh is determined during the day and follows the wholesale market in near-real-time. The time interval can span an hour, 30 minutes, or 15 minutes and consumers can get the notice from an hour to 15 minutes ahead of the price setting, reflecting real-time conditions.

Why is dynamic pricing, like, so hot right now?

Well, because dynamic tariffs are mandatory for the EU. With the Clean Energy Package, every energy user is entitled to access at least one energy supplier with dynamic pricing contracts. More specifically, every energy supplier with over 200,000 customers should include a dynamic tariff in their range of offers. Additionally, if the energy user doesn’t have a smart meter, they are entitled to request one alongside their RTP contract. 

Dynamic tariff is seen as a vessel to better manage the energy trilemma of secure, sustainable, affordable energy. As the EU states in the Internal Market for Electricity Directive, dynamic pricing is deemed a central demand response tool for the European Union to meet its renewable energy targets and manage overtly high energy costs and equal access to energy. Specifically, continent-wide consumer participation in demand response is the main lever for the mandate. Dynamic pricing is the key to participating in demand response and smart meter rollout should not get in the way: Every European should have a choice of a dynamic pricing contract, and if they don’t have a smart meter, they are entitled to request one.

As it seems, some energy providers don’t have much of a choice in caring about dynamic pricing – they simply have to. And this doesn’t have to be a bad thing! Turns out it’s in fact a good thing!

Who wins from dynamic tariffs and how?

The quick answer to who benefits from dynamic pricing is everyone. But, the main beneficiary is the energy system transitioning to a more stable and sustainable grid. For the main stakeholders in the system, there are tangible wins for energy providers and energy users alike. 

Energy providers

– Dynamic tariff add-ons are where the margin is at

Granted, the retail price of the kWH in a dynamic tariff reflects the wholesale price and there is little margin in that. However, a dynamic pricing contract opens up the price of add-ons, just not on the kWh price [1]. The add-on can be a fixed sum per month on top of the consumption, it can be added to the kWh price, or it can even be subtractive for a limited time to attract more customers. Where and what these add-ons are is the competitive arena among the energy suppliers. Hence, the better and more responsively designed these add-ons are, the more attractive the offer an energy supplier can present.

– Dynamic tariffs reduce price volatility risks for energy suppliers

With flat-rate tariffs, the energy provider is the one exposed to wholesale price variations and bears the price risk. So if we go back in time to 2022, when the price of the kWh increased by 15% [2], the consumers with flat rates would be charged the same as when the price of the kWh was half and their energy supplier had to buy the expensive kWh, sell it at a non-representative price and cover the cost. Dynamic tariffs that reflect the wholesale market eliminate this risk of energy providers covering the difference in cases of high price volatility.

Moreover, and particularly after the 2022 energy crisis, dynamic electricity pricing is an effective tool to make consumers allies in efficient electricity generation, reduced peak load, and a stabilised grid.

Consumers

First and foremost, dynamic tariffs allow consumers to better manage the final price of their electricity bills. As the dynamic pricing implementation document of the Council of European Energy Regulators European Commission stated, even with no change in consumption patterns, dynamic pricing can lead to approximately 55% electricity bill savings for all consumers. Particularly, the more consistent the consumption pattern is in a household, the greater the savings potential is.

This increased control over the final bill price also motivates consumers to engage more with their energy consumption and manage it in favour of everyone by responding to the price signals.

Dynamic pricing history lessons

Dynamic pricing doesn’t need to evoke panic. While it may be completely new in some European markets, dynamic tariffs in one form or another have been an option for energy users for over a decade. 

Currently, the European electricity market offers are split. Certain countries have had some form of dynamic pricing for a few years now and the whole market has some experience with it. For other countries, the dynamic tariff is brand spanking new, the relevant information has not been disseminated for long, and energy users are still apprehensive. Let’s take a look around Europe.

The latest numbers come from 2022, when only 8 countries have implemented dynamic electricity prices: Denmark, Estonia, Finland, Norway, Spain, Sweden, The Netherlands and The United Kingdom [3].

Spain

Spain was the first country to introduce dynamic pricing as the default contract for consumers. Including commercial consumers, 75% of the Spanish final energy consumption is based on dynamic pricing [4]. More than half of the small consumers have opted for dynamic price contracts and the switching rate in domestic contracts stands at 9% [5]. Dynamic pricing seems to not have affected energy consumption as the usage patterns have shown no significant change. To influence this, CNMC, the competition regulator in Spain, is rallying initiatives such as establishing 3 distinct time periods, redesigning the distribution tariff, and promoting energy efficiency in communications.

Norway

In Norway, a country with comparatively high penetration of electric vehicles, approximately 71% of households and 88% of small and medium enterprises are on a real-time dynamic tariff. Conversely, only 2% of households are on a fixed-price contract [4].

Estonia

Estonia, a frontrunner in digital processes, exemplifies that high digitalisation is a factor in the uptake of dynamic pricing. Within 3 years of their introduction in 2013, spot tariff contracts that follow wholesale prices have doubled in residential consumers [4]. 

Italy

Italy introduced dynamic pricing in 2010, making time-of-use tariffs with day and night tariffs the default for all residential consumers. The price difference may be small, between 3-7%, however around 60% of households slightly shifted their electricity demand. Due to high transmission network costs in Italy, the TOU tariff savings opportunity may have been more positively perceived [4].

Germany

Similarly, Germany started offering TOU dynamic pricing over 50 years ago, with a day and night price variation, made widely available with double meters. The smart meter rollout in Germany has been notoriously slow affecting the uptake of real-time dynamic pricing making more variable pricing available to only half a million out of the 41 million households [6]. Nevertheless, since the introduction of the EU Directive, energy providers with over 100,000 customers must offer more variable tariffs, extending the offer to over 70% of German households [5]. 

Finland

Finally, Finland was another early adopter of variable pricing. TOU tariffs have been available in Finland since the ‘70s to accommodate the country’s high rate of electric heating. Nowadays, Finnish energy users can also choose a real-time tariff or a flat rate, yet only 7% have opted in to real-time pricing.

How do consumers react to dynamic pricing?

While the benefits of dynamic pricing are numerous for energy providers, users, and society as a whole, the uptake of dynamic tariffs isn’t without its challenges – and consumers are not the only hurdle.

In a 2021 survey during the Dynamic pricing in the electricity retail market debate organised by the Florence School of Regulation, energy professionals revealed their attitudes toward dynamic pricing during a survey. The conviction of energy professionals themselves is not the most enthusiastic. Less than half of the survey respondents see dynamic pricing playing even a medium role in the flexibility of the energy system. However, 90% of this segment pinpoint the obstacle in low consumer awareness and behaviour as the main obstacle. At the same time, many of the respondents disclosed that they offer dynamic pricing contracts but don’t actively promote them.

There is consensus: The uptake of dynamic tariffs has not been as… dynamic as expected. However, the lukewarm reaction can be attributed across the energy system:

1) The majority of consumers show lukewarm interest in dynamic tariffs

Naturally, the expected human biases are present in energy users. Usually, consumers are risk averse, have a justified loss aversion bias, focus more on the potential losses than the potential gains, and respond better to short-term gains than long-term gains [4]. These attitudes have been amplified particularly after the 2022 energy crisis.

The truth is that with variable electricity prices, energy users are asked to make a big change and trust the energy system. To counteract this, dynamic pricing should be introduced in increments across the board: 

  • A realistic, achievable goal should be to hit critical mass with dynamic tariff contracts;
  • The gains of dynamic pricing should be communicated simply, clearly, consistently and in financial savings figures. 
  • The price variability should be slowly introduced, starting from dynamic TOU and aiming for real-time pricing, as the EU suggests [7].

2) The incentives for dynamic pricing are perceived as lukewarm

As the example of Italy demonstrated above, since such a big part of the electricity costs are fixed network costs and taxes, consumers may not perceive the savings margins in retail prices to be worth the effort. Network costs in Europe typically make up 40% of the total retail price and taxes across Europe range from 6% to 68% of the retail price [4]. These fixed costs in combination with the low peak and off-peak margins make it a challenge to motivate the change to a dynamic pricing contract.

3) The slow smart meter rollout is affecting the uptake of dynamic tariffs

As established, smart meters are not necessary for dynamic pricing. However, the type of dynamic pricing that most effectively delivers its benefits a) requires detailed data and b) enables energy users to respond to price signals that are as close to real-time as possible. In this vein, the smart meter rollout has a significant impact on how effective dynamic tariffs can be.

The European Commission acknowledges the lack of real-time information as a blocker already in the relevant 2019 Directive. To that end, the Directive strongly urges full smart meter deployment to the Member State governments and mandates that smart meters must be provided to any consumer who wishes to have real-time pricing, regardless of the national policy or nationwide rollout. 

Granted, the uptake of dynamic pricing is not skyrocketing but it is not doom-and-gloom either. In most cases, the European energy market is still adjusting to dynamic pricing and the EU Directive. But there are tangible solutions to overcome all of the obstacles above. Approached systematically and using lessons learned and best practices, dynamic pricing can truly become the change factor the market projects it to be.

Best practices: How to successfully design and implement dynamic tariffs

1) Design dynamic pricing contracts clearly and with the right level of variability

The Directive here is clear: Dynamic tariffs should be clear and easy to understand, with perceptible, tangible savings and price signals. 

– Intra-day or day-ahead?

Depending on the wholesale market, a retail dynamic pricing contract can be day-ahead, with the prices determined the day before, or intra-day, where the price is set every hour, half hour, or 15 minutes, according to the wholesale price. The EU recommends day-ahead pricing as the intra-day market pricing has more multilayered requirements and as such will be more complex to implement. For these reasons, if intra-day market prices are an available option, they should be accompanied by the appropriate digital structure that allows for automation and alerts.

– Real-time or time-of-use?

Dynamic tariffs should be based on actual meter data. A price that corresponds to the consumption times is deemed critical to provide the right incentive for consumers. This means that the Directive favours the types of tariffs that are as close to the real-time end as possible and are mandated as an available option at minimum. However, dynamic time-of-use contracts are more likely to appeal to two user segments: The price-sensitive energy users and the users with many high-consumption appliances with flexibility. 

– Contract offer smorgasbord or à la carte?

To bridge this gap of contradictory recommendations, an energy provider’s flexible offer can range to a few types of dynamic pricing. As a matter of fact, the Directive also suggests that energy users should have the option to opt-in to multiple types of contracts [7]. An example of this is Estonia’s “spot tariff”, a combined package of real-time pricing and time-of-use rates based on the wholesale prices of previous months. However, Estonia serves as a counterexample as well: The Estonian energy market includes such a wide variety of dynamic pricing options that they work at the expense of transparency and contributed to the stagnation of the uptake [4]. Ultimately, when redesigning the energy offer, strike the right balance between a variety of options and clarity.

In this process, don’t overlook the fixed contracts. A fixed price contract must still be an option in every European market – and they should be fairly priced.

– To price cap or not to price cap?

Lastly, steer away from price ceilings or floors as they can be counterproductive in sending the right price signals. While it may be an instinctive reaction after the energy crisis lessons, the EU has accounted for this exact risk. The 2023 Regulation proposal that follows the 2019 Directive takes the risk off of energy providers and consumers alike in the case of a crisis: If the retail prices increase by 70%, governments should be apt to apply targeted interventions in price setting that include relief on consumers and compensation for suppliers, when they are selling energy below cost. 

2) Aim for critical mass and target the right customer segments

Targeting the customer segments more likely to respond to dynamic pricing is a highly effective to hit critical mass. The ASSET Study on Dynamic retail electricity prices pinpoints two segments:

– Small and Medium Enterprises

SMEs are more likely to opt-in to a dynamic tariff quicker than households to achieve bill savings – especially considering the fact that they can make a real dent with their consumption adjustments.

– Households with high electrification rate

The ASSET study explains that the more advanced a consumer is, the more positive the response is. Consumers with a high rate of electrification, smart home appliances, EVs and PVs are the ones with the most flexible and easier access to energy consumption management. Moreover, these advanced energy users are the ones who can benefit the most from dynamic tariffs and at the same time bring real profit margins to aggregators. 

Finally, the uptake of dynamic pricing contracts is accelerated by removing friction for all customer segments: The switch to a dynamic tariff should be as quick and easy as possible and allow for a trial period with a shorter minimum contract period to make the change -let’s be frank!- less intimidating for energy users.

3) Educate energy users on the benefits of dynamic pricing

By its very essence, the dynamic pricing reform requires active and engaged consumers to fulfil its purpose of secure, affordable, sustainable energy. As we saw earlier, today’s energy users have not yet reached the level of participation and engagement needed for dynamic tariffs to work effectively. This means that it is up to the energy system -energy regulators and suppliers- to mobilise energy users.

If the dynamic pricing contracts are thoughtfully designed, communicating their benefits clearly and in a data-driven way should be a natural outcome. What is in the direct control of energy suppliers is the communication of potential savings from their designed dynamic tariff contracts in a way that addresses consumers’ biases: Short-term gains, a sense of security and stability around price volatility, and direct savings comparisons with fixed or time-of-use contracts are key elements. 

At the same time, the long-term benefits from advanced electrification, automation, smart home appliances or home improvements shouldn’t be neglected. A higher savings margin and a quantified ROI can serve as an additional incentive for energy users to participate more in the advancement of the energy system.

Energy suppliers are not alone in this. Educating and advancing the market is the shared responsibility of suppliers, national authorities, and regulators

4) Transparent and open price & energy data – everywhere for everyone

Actionable data at different levels of granularity is the singular language that activates the incentives, real-time signal response, and transparency that lead to the outcome of the dynamic pricing regulation. Energy data must be provided in different forms and levels of analysis.

– Price comparison tools

At a national level, per the regulation, energy users must have access to at least one price comparison tool that includes all the dynamic tariffs available in the market and quantifies the cost range of every dynamic tariff for every individual as well as the financial impact of switching contracts. The launch and operation of price comparison tools fall within the responsibility of the governments and national energy authorities. While the national authorities are responsible for these tools, they can outsource their operations and management to any private company.

As of 2022, 25 EU countries with the addition of the UK have already launched their electricity price comparison tools [1]

– Billing information

Among the obligations that come with the provision of dynamic pricing contracts is a streamlined presentation of the electricity bill. The requirements are crystal clear and listed in the regulation [8]. The bill must be provided for free, monthly at a minimum, and include the following information:

  • Tariff name, 
  • Price and a price breakdown of the following components: energy, supply, network for both transmission and distribution, and all taxes, levies or other fees.
  • Consumption levels for the billing period 
  • End of contract date 
  • A link to a price comparison tool 
  • The benefits of switching contracts
  • The availability of different contracts. 

Dynamic pricing contracts based on actual meter data should include a visual monthly consumption comparison with the same month of the previous year and a comparison with a benchmark customer of the same profile. It is also recommended to include reference prices aggregated for an appropriate time interval, e.g., daily or weekly average, the price formula.

This billing information must be provided alongside standard information such as the supplier name and contact information, customer code, and date of payment due. Energy suppliers can also host this information in a dedicated digital space and direct consumers there from their bill.

– Energy management

Energy users should be able to see how they can shift their consumption according to price signals and how to adapt their comfort without negatively impacting their energy bill. As the Directive stresses repeatedly, energy users must be able to promptly respond to accurate price signals. However, prompt response to price signals is impossible with just information provided monthly on the energy bill. 

As a result, energy suppliers should provide their dynamic tariff customers with free access to their present and historical data, adequate reporting, and helpful insights, average consumption profile, to enable them to analyse their consumption, monitor the price associated with their consumption at time intervals equivalent to their dynamic contract, and respond to timely price signals. When no smart meter data is available, data and insights can spur on profiles based on household composition and typical consumption.

5) A special recommendation on Network dynamic pricing

One of the reasons for the lukewarm uptake of dynamic pricing is the consumer perception that a dynamic retail price will not make a big difference in their balance due to high fixed network costs. On top of this, the last years have seen an upward trend in the share of fixed network fees. Indeed, network costs comprise 40% of the total retail price for households and SMEs and 70% of the network component is distribution costs [4].

The study of the Council of European Energy Regulators does not overlook this and remarks that variable network costs can overturn that perception and have a real impact on the uptake of dynamic pricing. As network costs are more homogenous, a real-time price on the network component is something to be tested as a default option and is projected to have an observable trickle-down effect on retail prices too. Even though dynamic tariffs on network costs are not regulated, it is a great lever to accelerate the uptake of dynamic tariffs in retail electricity. Network providers, is this something to consider perhaps?

Powering down – A recap

Let’s wrap it all up. It is undeniable why everyone in the energy system should embrace dynamic pricing: As a minimum, it’s the law! But in essence, dynamic tariffs are a pivotal influence on energy user behaviour and are transformative for a secure, sustainable, and affordable energy system. At the same time, a successful dynamic pricing transformation requires shared responsibility and coordinated efforts from everyone involved.

For energy providers, there are three key takeaways: 1) Design your dynamic pricing offer thoughtfully, 2) give some marketing love to your new offer, and 3) give your energy users the data and insights they need to transform their energy consumption by using the incentives. And one last thing: remember, you can always ask for help. 

Hint: Eliq’s energy geeks all over Europe are a great place to start – ask them anything below!

Ask Eliq anything about energy management and dynamic tariffs!