A new study carried out by Oxford Martin School researchers and the Energy Systems Catapult has found reform of energy tariff pricing could encourage the switch from gas boilers to low carbon heat pumps.

Dr John Rhys of the Oxford Martin Programme on Integrating Renewable Energy investigated whether or not the fixed charges components of energy bills – for network, environmental and social costs – are efficiently distributed between the standing charge and unit price of electricity and gas tariffs.

These largely fixed costs pay for maintaining and upgrading transmission grids and distribution networks, balancing demand on the system, and supporting social and environmental policies.

The study found different consumers pay different contributions for the same fixed costs of making energy supply available, such as transmission and distribution charges, because costs are recovered through the unit price. This approach means:

• Consumers installing generation assets on their own premises, such as solar PV or diesel generation, under-paid their correct share of fixed costs (including ‘feed-in-tariffs’ through which they benefit). This is because they avoid many of the costs recovered in unit pricing by generating their own electricity;
• An artificial incentive has been created to build small ‘on-site’ generation vs large generation;
• Consumers installing low-carbon demand technologies, such as heat pumps, over-paid their correct share of fixed costs recovered in the unit price because they used more electricity.

This meant that overall consumers are:

• Under-charged for the fixed costs of making energy supply available;
• Over-charged for the units of energy they consume; and
• The fixed costs avoided by those with generation on their own premises have to be recovered in the bills of other consumers, including those in fuel poverty, increasing their energy bills.

The Cost Reflective Pricing study also found:

• Rebalancing fixed and volumetric charges, into the standing and unit prices respectively, would recover fixed costs more equitably across each bill-payer;
• If the cost of social and environmental policies were removed from energy bills and recovered through general taxation, the marginal cost of operating a heat pump would be lower than a gas boiler;
  • However, even spreading the environmental and social costs more evenly between gas and electricity would lead to a more efficient allocation of costs.
• “Time of use tariffs” that reflect the variable cost of delivering electricity at different times, would encourage the charging of electric vehicles (and other non-time critical demand) outside of peak periods and a more efficient electricity system;
• There was value in driving up the load factor of the electricity system, with technologies such as hybrid-heat pump/gas boilers potentially reducing the highest electricity peaks by a switching to gas during peak periods.

Phil Lawton, Power Systems Practice Manager at Energy Systems Catapult, said: “With heating and transport acc­­­ounting for around two thirds of UK carbon emissions, growth in heat pumps and electric vehicles will be important in meeting our 2050 targets.

“We need to make sure the way we charge for the fixed costs in the energy system reflects these exciting changes in technology and does not discourage consumers from taking them up.

“And we need to make sure consumers that generate their own electricity, through solar PV or diesel, are not over-rewarded, by avoiding some of these fixed costs at the expense of those who use the grid all the time, including vulnerable households.”

The study also found that the gas network may have a valuable role in future in meeting short duration peaks of demand via the use of hybrid heat pump/gas boilers. This would take advantage of the existing gas network asset, rather than investing in additional capacity in electricity generation/networks that will only be used rarely.

• See the full report here: Cost Reflective Pricing in Energy Networks: The nature of future tariffs, and implications for households and their technology choices