What’s up with energy tariffs?

[00:00:01.650] - Jon Slowe

Welcome to Talking New Energy, a podcast from LCP Delta. I'm Jon Slowe.

[00:00:09.370] - Sandra Trittin

And I'm Sandra Trittin. And together we are exploring how the energy transition is unfolding across Europe through conversations with guests from the leading edge of the transition.

[00:00:19.750] - Jon Slowe

Hello and welcome to the episode. Hi, Sandra.

[00:00:24.110] - Jon Slowe

Hey, Jon. How are you?

[00:00:25.590] - Jon Slowe

I'm good. Sandra, question for you. Tariffs, boring or exciting?

[00:00:32.310] - Sandra Trittin

I think it's getting more and more exciting, right? Because currently there's a lot of discussions going on in general about tariff structure on different levels, like grid tariffs or energy tariffs, feed-in tariffs. Just recently, I heard about potentially flexible feed-in tariffs. So, I think that's getting really exciting, and I'm happy to have our guest today with us.

[00:00:57.530] - Jon Slowe

So welcome, Chloé. Chloé Deparis. Hello. Hi.

[00:01:00.530] - Chloé Deparis

Hi.

[00:01:01.690] - Jon Slowe

Chloé is joining us from our New Energy Strategies team at LCP Delta. And, Chloé, what's up with tariffs? Can you give us your top three trends from your research looking at tariff evolution across Europe?

[00:01:17.830] - Chloé Deparis

Yeah. Well, the first one is, as you started talking about, is that tariffs are becoming hot. They're becoming the hottest thing at the moment. Interestingly, they're not the prerogative of energy retailers anymore. The second one would be that appliance-specific tariffs, so tariffs that are specific to owners of specific technologies, are becoming more and more popular. The third one would be on the other side of the innovation spectrum, we are also seeing hyper-simple, hyper-protected tariffs emerge. So, such as subscription tariffs would be a prime example of that. That would be my three hot trends with tariffs.

[00:02:11.130] - Jon Slowe

Sandra, any you'd like to start with it?

[00:02:14.200] - Sandra Trittin

I would be really curious around that over a simple subscription tariff, starting from the back. If you could explain a little bit more what's behind that.

[00:02:29.170] - Chloé Deparis

Yes, definitely. Okay. The way tariffs are evolving, we see a lot of dynamic tariffs emerge. Dynamic tariffs being tariffs... The way we define it is tariffs that are... Where each hour of the day, if not each half hour of the day, even maybe each quarter hour of the day, is priced differently and updated daily. That's one side of the tariff spectrum. So, we have hyperreactive tariff that mirror directly the wholesale energy markets, which are also very risky. Not all consumers want that. On the other side of the tariff spectrum, we have subscription tariffs. Subscription tariff are the exact opposite of a dynamic tariff. They're tariffs where the amount you pay per month isn't directly correlated to your energy consumption. So, at the start of your contract, the energy retailer will estimate how much you consume or give you a threshold of consumption that you can reach. And so long as you remain within that, you'll pay the exact same amount per month without any adjustments at the end of the year. It's the best way to protect the consumer from both price and volume risks.

[00:03:56.630] - Sandra Trittin

That's exciting. But then it puts all the risk on the... On the utility side, right?

[00:04:01.370] - Chloé Deparis

Exactly. Dynamic tyres put all the risk on the consumer. Subscription tyres put all the risk on the retailer. That's why I was saying that they're the mirror opposite of each other.

[00:04:14.740] - Jon Slowe

I guess it comes then down to how you can manage that risk.

[00:04:18.520] - Chloé Deparis

Exactly.

[00:04:19.910] - Jon Slowe

If you've got a household with solar, a battery, then presumably there is a lot of waste for a retailer to manage that volume risk or understand the volume risk that they're taking.

[00:04:32.820] - Chloé Deparis

Exactly. Subscription types are typically perfect. They're not the same way that a dynamic tariff is not good for all types of household. A subscription tariff is not good for all types of household. It's typically perfect, in my opinion, for a flat renter, for example, someone who anyway doesn't have much control over their consumption and doesn't have much leverage to act on their consumption. We see a lot of subscription types in Spain, in Finland, and we also are seeing subscription tariff entering new markets like Italy, and even the very first subscription tariff was launched recently as a DESNZ (Department for Energy Security and Net Zero) pilot in the UK.

[00:05:21.790] - Jon Slowe

Okay. Well, let's move up your three trends. The second one was Appliance-specific tariffs. Give us a feel for what type of appliances you're seeing here, what type of appliance-specific tariffs.

[00:05:40.150] - Chloé Deparis

Well, historically, appliance-specific tariffs were very much just EV tariffs. It was tariffs that were specifically designed for EV owners. They can be anything from a very simple static time-of-use tariff with extra chipped night rates, for example, for an EV owner to incentivise them to charge during We are also seeing what is called type-of-use tariff, which is a tariff where the rate changes not based on the time of consumption, but on the type of consumption. So, the time that is consumed by your EV, regardless of the time, is charged at a different rate than what is consumed by your home. So, EV tariffs were historically the main type of appliance-specific tariff, but the past year, we've seen a lot of heat pump tariff emerge as well, in the UK especially. We're even seeing battery storage tariff meant for people with batteries and even storage heater tariffs.

[00:06:48.850] - Jon Slowe

Okay. I guess part of the trick is what if you got a household with an EV, a heat pump and a battery? Maybe we have more time to dig into that here, but right now in this bite-size podcast. The first trend you said was tariffs are not always now the prerogative of only energy retailers. I'm intrigued by that.

[00:07:18.930] - Chloé Deparis

Yes. That's really something we've seen this last year. Tariffs are becoming hot because it's a way for the people managing the tariff, meaning that historically the energy retailer to incentivise shift and demand, to also be able to leverage the flexibility of the asset. That's really what's behind also a lot of these tariffs. We're seeing technology suppliers enter technology providers enter this space now with companies like Enpal, 1Komma5, Aira, Viessmann, tado, and so on and so forth, companies that historically are just solely technology providers have now started offering tariffs as well because it helps improve the investment case of the technology they sell. It helps also ensure that they manage the whole customer journey from technology sale all the way to the retail. It is also on the background of that, it also provides them the incentive later to flex the assets that they sell.

[00:08:26.580] - Jon Slowe

Energy retailers today shouldn't think they own the tariff world because there's lots of new, well, I guess new energy retailers and traditional non-energy retailers.

[00:08:37.680] - Chloé Deparis

Exactly.

[00:08:41.270] - Jon Slowe

It's interesting to see that they come from all the different ranges of the asset types. As you mentioned, from the heating to the storage, they all offer now also the tariff on top of the hardware.

[00:08:58.940] - Chloé Deparis

Exactly. Exactly. It links very much my first and my second point, because what they typically offer is either an appliance-specific tariff that is meant specifically for the appliance that they sell, or ultra-smart dynamic tariff, so a it's a dynamic tariff that is typically combined with appliance optimisation or even whole home energy management so that they can flex and manage and optimise the appliance based on the price.

[00:09:36.180] - Jon Slowe

So, Chloé, a lot of change. My take would be that we're relatively early in this evolution, revolution of energy tariffs, and there's a lot of experimentation going on at the moment about what works commercially, what works for different customer types. Is that the right picture to have in my mind?

[00:10:00.050] - Chloé Deparis

It definitely is. That's exactly the moment we're in right now is a heightened moment of innovation. People are trying a lot of different things and trying to see what works for which type of customer because one of the main things that we're seeing is that different customers will want and need different tariffs based on which appliance they have, based on which level of risk tolerance they want to have, based on how much control they're able to or willing to give away. And so, all these different customer segments will need different tariffs. And retailers at the moment are really trying to see, okay, what works for whom? What are the best way to get these types of customer or these types of consumer?

[00:10:45.770] - Jon Slowe

Which I think might be quite a challenge as well, right? Because from the history, they are just used to have, let's say, one or two tariff types for all of their customer base. And now all of a sudden, they need to differentiate much more.

[00:11:01.910] - Chloé Deparis

Exactly. There's the risk... There's the risk also of making it too confusing to the customer. And so, there's this really tight line to walk on, providing more tariffs, from more customer segments without providing too much that they would confuse or get the consumer completely lost.

[00:11:26.530] - Jon Slowe

Customer-centricity, Sandra, I guess. That's where we always come back to.

[00:11:29.900] - Sandra Trittin

Exactly.

[00:11:30.500] - Jon Slowe

We better leave it there. There's a whole load of conversations that could flow from what we just talked about, but it is a bite-sized episode, so we'll leave it there. Have a look in the show notes if you'd like to learn more about tariffs. We'll put some links into some of the research that Chloé has been leading. Hope you enjoyed that little window into the hot topic of tariffs and look forward to welcoming you back next week. Thanks and goodbye.

[00:12:00.200] - Jon Slowe

Thank you. Bye. Thank you.

[00:12:02.700] - Sandra Trittin

Thanks for tuning in. We are excited to bring you captivating conversations from the leading edge of Europe's energy transitions. If you got suggestions for topics or guests for future episodes, please let us know.

[00:12:15.260] - Jon Slowe

If you're enjoying the podcast, then please do rate it and share it with colleagues. For show notes, transcripts, and more, please visit lcpdelta.com.