What do hefty electricity charges and Uber's 'surge' pricing have in common?

Mark Alston
posted by Mark Alston
31 March 2015

A colleague was relating a story of how he'd been 'stung' by a £36 Uber taxi fare after a late night out in Manchester. His six-mile trip generally costs around a third of that price at non-peak times, but Uber's controversial 'surge' pricing strategy substantially increases prices to match supply with high demand.

There's nothing new about this ‘dynamic pricing’ model; it's very similar to the business electricity supply market, where network operators charge a large premium when demand for electricity is at its highest.

While late night revellers can choose to stagger home or catch the night bus instead of paying 'surge' prices, large energy consumers also have options to mitigate peak charges by using smarter demand management policies.

The rise in third party charges for electricity is driving an urgent need to implement demand side energy management measures to alleviate hefty increases in network charges.

This business imperative is underlined by findings from a report that predicts overall third-party costs for half-hourly electricity users will increase by 4 per cent in 2015-16 and 10 per cent in 2016-17, compared to a 2014-15 baseline.

The analysts forecast that while Ofgem's new price controls will bring a 14 per cent reduction in distribution charges for 2015-16, all other charges will go up - particularly the cost of transmission, which is predicted to jump by 16 per cent in 2015-16 and a further 14 per cent in 2016-17.

By 2016, third-party charges are set to account for more than 50 per cent of a large electricity user's bill. But what can businesses do? While general energy efficiency measures do produce incremental savings, the best returns can arise from targeting the peak times of day when network charges are highest.

In distribution networks, the massive weighting of usage charges towards 'red band' periods is incentivising 'peak lopping' across the UK. For those organisations with the flexibility to avoid usage at peak times, it's a no-brainer. The key priority is to minimise demand during ‘triads’ (the three highest annual half-hour demand periods on the electricity system, i.e. winter tea-time).

But before 'peak lopping', check whether you have a 'pass-through' contract - where savings in third party charges benefit your business, rather than the supplier.

Even if you don't have the flexibility to manage your peak load, it might be worth moving to a 'pass-through' contract so that you only pay the actual published rates of third party charges, rather than a premium for the supplier's risk.

National Grid’s 'Demand Side Balancing Reserve' auctions are also encouraging action. All those businesses using significant amounts of electricity, particularly those spending in excess of £150,000 per year with half-hourly metering, should explore the potential of demand side management. It may have been something that was rejected in the past, but with spiraling third party charges, the benefits are now much more compelling.

Mark Alston is director at ENER-G Procurement

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